Retirement presents a major transition in life that offers several benefits and concerns. Retirement is a time to slow down and enjoy the life that all your hard work has made possible for you. It is a time to go after your dreams and enjoy your hobbies. But all of these things require the means to do them; they require money. This is where an annuity can make all the difference.
Where the money comes from in retirement
At retirement there are usually three primary sources of income to fund the activities you want to do and pay all of the day to day expenses. These sources are traditionally Social Security, work pension plans, and retirement savings. The future of Social Security is questionable at best, and many employers have ceased employer sponsored pension plans. This leaves retirement savings as the primary, if not only, source of income in retirement.
The major issue with retirement savings is that the average life expectancy is growing almost every year and it becomes harder and harder to insure that the money you save will last as long as you do. Luckily there is a financial product that exists with the sole responsibility of making sure your income never ends, as long as you live.
How an annuity guarantees that you receive an income
How can a product guarantee that you will never run out of money? How is this possible and how does it work?
Annuities are offered by insurance companies. An annuity is essentially the opposite of a life insurance policy, and insurance companies use longevity and investment data to determine how long your money will need to last. By spreading the risk over a large number of policy holders the insurance company reduces its risk of losing money and can then guarantee to pay you for as long as you live. Essentially, the people that die young are paying for the people that live longer.
So, for example, a policy holder may give the insurance company $100,000 and receive $1000 a month for life. That same person may die only 6 months later. The remaining money now belongs to the insurance company and helps pay for that other policy holder who lives another 30 years and has well exhausted the money they paid the insurance company.
So why should I buy an annuity?
Simply, because there is no other product that will guarantee that you will never out live your income. With an annuity there are many other benefits as well, such as a the ability to earn interest and/or dividends on your money, tax benefits, estate planning benefits, and added liquidity that you won’t get from bank products.
There are also many different options when searching for an annuity. There are fixed and variable annuities, immediate and deferred. Each have unique benefits that can further help you achieve the financial freedom that you need in retirement.
An annuity is not the end all product when it comes to retirement planning, annuities can be an important part of your retirement plan, but they should not be the only retirement plan that you have. Consult a tax adviser for specifics on how an annuity can provide you with tax benefits.
In retirement your money needs to last as long as you do. Running out of money in retirement means not being able to do all the things that you wanted to do, and may mean having to return to work when you are least able to do so.