This is a collaborative post by Ellie Jo about finances.
Having some income guaranteed for your retirement is attractive to anyone. If you know have income coming every month for the rest of your life, you can worry less about running out of savings or trying to invest. If you don’t have a pension, you might consider an annuity to boost your income. Here’s what you need to know.
Table of Contents
Annuities Are Simple And Complicated
A basic annuity is simple to understand. With a single-premium immediate annuity, you pay one lump sum to an insurance company and will get a set amount of income for life, regardless of how long you live. These payouts are based mostly on your age, gender, and interest rates when you buy the annuity. Payouts are usually lower for women as they usually live longer than men.
Income annuities are useful for people planning to retire who don’t have meaningful streams of retirement income, like Social Security or a pension, or for those who are fearful of the stock market.
Not all annuities are this simple. There are also variable, fixed, fixed-index, immediate, and deferred options. Other types of annuities defer taxes or provide protection against stock market loss.
They Require Commitment
With an income annuity, you can’t access your lump sum after you give it to your insurance company. The largest monthly payouts come from a life-only annuity. However, there are two factors to be considered with this option. These payouts will stop when you die, and they cover only you. A surviving spouse would get nothing.
You could guarantee payouts for a set period of time, which would be paid to a surviving spouse if you died, but with lower monthly payouts.
As you can only access that money as a lifetime income stream and won’t be able to make withdrawals, think carefully before you tie up much of your savings in an income annuity. Keep other money accessible for expenses and emergencies.
The annuity’s fixed payout will lose purchasing power over time. Some companies will adjust payouts for inflation, but these have lower starting payouts. Instead, you could invest other money for the long-term to help keep up with inflation.
When you are deciding how much to invest in an immediate annuity, add up your regular expenses in retirement, subtract any sources of income, such as your pension, and think about buying an annuity that would fill that gap.
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Another option for income annuity is a deferred-income annuity. These let you invest a lump sum now, but payouts won’t start until the future. If you are still alive when payouts start, you will get much more each month. However, if you die before then, you get nothing. You could look for a version of the annuity that will guarantee that you or your surviving heirs will get back at least as much as was originally invested, in return for a lower monthly payout.
Next: Read why it’s never too early to start planning your retirement.
Greg is a Chartered Financial Analyst (CFA) with 22+ years experience in Financial Services. He has held numerous FINRA Securities licenses (series 7, 63, 65, and 66), and is an expert on Investment Products and Financial Planning. Greg has 22+ years experience as a real estate investor and degrees in Psychology and Philosophy.
Greg has been quoted/interviewed in Yahoo Money, Yahoo Finance, USA Today, Authority Magazine, Realtor.com, Business Insider, and others.
Greg is an avid runner, and the father to identical twin girls and their awesome brother. His love of budgeting and his kids led him to join The Great Resignation in 2021.
Disclaimer: Any Financial Tips on ChaChingQueen are general and informational. Speak with a professional about your specific situation.