An annuity is a financial instrument where a lump sum is made in advance and money is paid out over a set number of years (ten years certain, for example) or a lifetime of one of more individuals; either immediately or at some future date. This payout is known as a single life or joint life annuity. Many state lotto offices will pay either 50% of the total in cash or they will pay it all if you take a monthly check. The instrument is most often offered by an insurance company but can be offered by large companies or state lotto offices. It is often referred to as the opposite of life insurance.
Life Insurance vs Annuity
Life insurance is a financial instrument where you pay so much a month or annually, and if you die, your beneficiaries receive a lump sum amount. An annuity is where you pay a lump sum amount and you and or others (joint account) receive so much every year or every month.
Usually, large companies offer annuities, to employees as part of a defined benefit retirement package. The defined benefit plan is often called a pension plan. The defined benefit plan takes your current age, your salary or hourly wage and the length of time you have worked at the company to arrive at a formula and determine that you will receive so much money every month when you retire. This is the defined benefit part of the plan = (age) x (annual income) x (years at the company).
Which is Better for Older People?
These defined benefit plans tend to favor older employees who make a good annual income that have worked at the company forever. Because it is not favorable to younger, lower income employees, companies now offer some sort of 401k plan where younger employees are more in control of their retirement.
401k Advantages for the Young
The advantage of a 401k plan for younger people are the 401k plans are portable. That means that you do not have to work for 20, 25, 30 or more years at a company to collect. Some companies will let you take the 401k immediately no matter how long you work for the firm. Others will make you work for five or more years and you can take it all when you leave and transfer it to another plan at your new job or roll it into an IRA. Some companies will even match your contribution to the 401k so in effect you are getting “free” money by signing up as soon as you can.
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