Retirement income estimates vary considerably, but one thing is clear across the board: it’s essential for every individual to have a solid retirement strategy that includes enough savings and/or a steady stream of cash to guard against outliving assets. One rule of thumb is that an individual will need 70 percent of pre-retirement yearly salary to live comfortably, but those who are looking to travel or improve their lifestyle will likely need more, according to CNN Money.
Annuities can provide that reliable and periodic payout. Annuities function very differently than other investment types. Essentially, an annuity is a contract between an individual investor and an insurance company. It’s a product that’s not only designed to meet retirement goals, but other long-range goals. An annuity requires an individual to make either a lump-sum payment, or a series of payments to buy in. The insurer then makes payments to the individual on a time schedule—monthly, quarterly, annually, bi-annually, etc.—or as a single payment at a future date. Payment amounts vary, but are typically influenced by the size of the initial investment and the length of the payout period.
There remains some mystery about annuities among the public, and even within the ranks of agents. At its most basic, an annuity is an income-producing insurance product that can act as a source of regular income for investors. Annuities can be used as one component in an individual retirement plan, in combination with Social Security, pensions and other retirement savings and sources of income.
There are two basic categories of annuities available to investors.
Deferred annuities: These require an investment of money either as a large up-front sum or as monthly payments for a period of time until the investor plans to withdraw, which is typically in retirement. All money invested in deferred annuities accumulates tax-free until the investor retires. These annuities are a good fit for investors who either have significant money to invest at one time or a minimum of 20 years to grow their money before receiving monthly payouts.
Immediate annuities: Also known as income annuities, immediate annuities begin to pay out immediately, or shortly after investment. These annuities are especially appealing to those nearing retirement. Also known as lifetime annuities, Investopedia calls this category of annuities “The Instant Pension Plan,” since it can transform a sizable nest egg into predictable, regular payments for the remaining lifetime of the investor.