When you’re planning for retirement, one of the biggest questions you’ll face is how to turn your savings into reliable income. That’s where annuities come in. An annuity is a financial product you purchase—typically from an insurance company—that provides regular payments for a set period or for life.
For many retirees, annuities offer peace of mind. They can fill the gap between Social Security and your spending needs by guaranteeing income that won’t fluctuate with the stock market or run out in your lifetime.
Understanding the Basics
There are several types of annuities, but the most common and straightforward for retirees are fixed immediate annuities. You pay a lump sum upfront and begin receiving monthly payments right away. These payments can continue for the rest of your life or for a set number of years, depending on the contract.
Here’s an example:
A 65-year-old man who invests $100,000 in a fixed immediate annuity might receive about $650 per month for life. That translates to $7,800 per year in guaranteed income. The exact amount depends on your age, gender, and current interest rates when you buy the annuity.
Pros of Annuities
- Guaranteed income: You don’t have to worry about stock market performance.
- Protection against longevity risk: You won’t outlive your income.
- Simplicity: Once it’s set up, you know what you’ll receive every month.
Cons of Annuities
- Limited flexibility: Once you hand over your money, you generally can’t get it back.
- Inflation risk: Unless you buy an annuity with inflation protection, your purchasing power may erode over time.
- Less for heirs: Most annuities don’t allow for passing unused funds to beneficiaries unless specifically structured to do so.
A Strategic Approach
If you’re considering annuities but don’t want to commit your entire retirement fund at once, you can use a strategy called laddering. For example, you could buy one annuity now and another in a few years. This allows you to take advantage of potentially higher interest rates in the future and diversify your payout structure.
Annuities aren’t for everyone, but if you’re worried about running out of money, they can be a useful tool in your retirement plan. Think of them as a way to turn part of your savings into a personal pension.
