While many folks rely on Social Security during retirement, it often isn’t enough to live on.
Annuities offer another option to fund retirement years, with a guarantee that you won’t outlive your income.
Below, we explain what annuities are and how they can provide a steady stream of income during your retirement years.
What are annuities?
Annuities provide a long-term fixed stream of income, either for a set amount of time or for a person’s lifetime.
They are contracts between the purchaser and an insurance company.
These contracts can be purchased with a one-time, lump-sum payment or through a series of payments.
Annuities, frequently used to fund retirement, can either begin payments immediately or down the line if you defer.
The different types of annuities include Guaranteed Income Fixed Annuities, Growth Potential Fixed Indexed Annuities, and Flexible Income Variable Annuities.
How do they work?
Annuities provide additional income by converting a lump-sum payment into a steady income stream that a person cannot outlive.
This occurs through a process of accumulation and annuitization.
During the accumulation phase, your initial investment grows tax-deferred for anywhere from 10-30 years depending on your contract.
From there, you start the annuitization phase, in which you receive monthly payments.
In the case of an immediate annuity, there is no accumulation phase.
By signing the insurance contract, all longevity risk is transferred to the insurance company.
In exchange, you’ll pay monthly premiums as determined in the contract with the insurance company.
It’s important to note that you can lose money in a variable annuity or index-linked annuities, but not in an immediate annuity.
Who offers annuities?
MetLife, Lincoln Financial Group, John Hancock, Nationwide, and New York Life are a handful of the top-rated companies offering annuities.
Fidelity Investments will soon offer its Guaranteed Income Direct platform, which can turn your retirement funds into a steady income stream.
It announced the move last month, and the platform is scheduled to launch for select clients in the first half of 2022.
It’ll then have “broad availability” in the second half of 2022.
