One of the biggest advantages that annuities offer is the ability to make up for a failure to build a sufficient retirement nest-egg over the previous decades. Instead of contributing each month of a working life, you can take a lump sum. You can then take that lump sum and swap it for a regular income. That income can be paid annually, quarterly, or monthly.
For many people an annuity gives a retirement a certain amount of stability. Together with their Social Security income, they can know exactly how much money they’ll receive each month. They can then budget accordingly. The payout period can last for a set period, such as five or ten years. More commonly though, people buy annuities that last them for a lifetime.
That can risk turning an Immediate Payment Annuity into a gamble. If the buyer lives for a long time, they could receive a higher return from that lump sum than they could have done through any other investment. If the buyer dies shortly after buying an annuity, however, the insurance company can keep the rest of the fund. Heirs could find that a relative’s $100,000 savings has turned into a couple of thousand dollars of revenue.
There are solutions. Joint and Survivor annuities continue paying the annuity to a second party, such as a spouse. Other annuities continue to pay to a beneficiary after the death of the buyer for a fixed period. It’s also possible to buy a cash refund annuity that returns a lump sum in the event of the buyer’s premature death.
Each of these extra conditions adds costs to the annuity, though, and reduces its returns.
- The Four Stages of Retirement
- When Can You Retire?
- How Much Will You Need to Save Before You Can Retire?
- How to Create a Retirement Savings Habit
- The Benefits and Costs of a Pension
- Retiring with a 401(k)
- The Benefits of a 401(k) Plan
- The Costs of a 401(k) Plan
- Vesting a 401(k) Plan
- 4 Types of 401(k)
- Rolling Over Your 401k
- Leave Your Old 401(k) with Your Old Employer
- How to Rollover Your 401(k)
- Individual Retirement Accounts—IRAs
- How an IRA Works
- Working Your IRA With Your 401(k)
- 3 Types of IRAs
- SEP IRA Limits
- The Benefits of an Annuity
- Deferred Annuities
- Immediate Payment Annuities
- Fixed Index Annuities and Variable Rate Annuities
- Qualified and Non-Qualified Annuities
- Changing Your Annuity—The Section 1035 Exchange
- The Limits of a 1035 Exchange
- How to Plan for Your Retirement
- How to Start Planning Your Retirement