So You Want An Annuity…

Imagine yourself in retirement: you wake up for a nice hot breakfast, take a walk and enjoy the outdoors, and have a smile on your face. You decide to walk into your favorite restaurant for lunch, but as you sit down you remember that your retirement account is running out faster than you expected (home repairs, medical bills, etc.).Does this mean you have to go back to work again? With an annuity, that’s an option you won’t have to resort to.
An annuity is a financial product you can buy to lower the risk of running out of money in retirement. Just like you insure your home, you can insure your longevity by passing on the risk that you outlive your savings to an insurance company. In return, you have the option to get guaranteed lifetime income, or take out the lump sum of whatever money you have accrued and put in. While this may sound too good to be true, it’s actual very good and very true.
The way an annuity works is simple: you choose to put in either a lump sum, or make payments over the course of a given time period (e.g. 10 years). Whichever way you contribute, your job is to not touch the money until the agreed-upon time period has elapsed, and during the interim the insurance company will try to make that money grow through various means. Once time is up, the insurance company will have made enough money to pay you a fixed amount for the rest of your living years, or let you walk away with a lump sum. The payout is determined by the agreement you made for your annuity.

An annuity may be right for you if any of the following criteria apply to you:

• Your Social Security and/or pension benefits are not enough to cover your regular expenses.
• You have already started saving for retirement.
• You are in above-average health and hope to live a long life.
• You are seeking greater certainty in retirement.

While helpful, an annuity isn’t designed to provide everything you need in retirement, but rather serve as a supplement to what you already have. In particular, they do not have the potential to provide high returns, and they are typically not indexed for inflation.

The protection they provide is against outliving your saved money, and as such annuities are first and foremost an insurance product. You should only buy an annuity – or any insurance product for that matter – for its guarantees.