How Annuities Can Provide Lifetime Income
When planning for retirement, one of the biggest concerns people face is outliving their savings. With increasing life expectancy, many retirees find themselves wondering, “How can I make sure my money lasts as long as I do?” This is where annuities step in.
Annuities are financial products designed to provide a steady income stream, often for life. In this post, we’ll break down how annuities work, the types of annuities that provide lifetime income, and walk through examples to help you understand their role in retirement planning.
What Is an Annuity?
An annuity is a contract between you and an insurance company. You pay a lump sum or a series of payments, and in return, the insurer agrees to make regular disbursements to you, either immediately or in the future.
These disbursements can be:
- For a fixed number of years (e.g., 10 or 20 years), or
- For the rest of your life, no matter how long you live.
The Core Benefit: Lifetime Income
One of the key features of many annuities is the guarantee of income for life. This is especially valuable because it:
- Protects against the risk of outliving your savings.
- Provides predictable, stable income during retirement.
Helps with long-term budgeting and peace of mind.
Types of Annuities That Offer Lifetime Income
- Immediate Annuities
- You pay a lump sum upfront.
- Payments begin almost immediately—usually within 30 days to a year.
- Great for retirees who need income now.
Example: Susan, age 65, invests $100,000 into an immediate annuity. In return, she receives $550 per month for the rest of her life. Even if she lives to 95, she keeps receiving payments.
- Deferred Income Annuities (DIAs)
- You pay now, but income starts later (often years down the road).
- Used to plan for income in the later stages of retirement.
Example: John, age 60, buys a deferred income annuity with payments starting at age 70. When he turns 70, he begins receiving $1,200 per month for life, ensuring he has income in his later years.
- Fixed Indexed Annuities with Lifetime Income Riders
- These offer potential for growth based on a market index (like the S&P 500).
- They include a lifetime income rider, which guarantees a minimum income for life regardless of market performance.
Example: Mike invests $150,000 into a fixed indexed annuity with a rider that guarantees 5% growth for income purposes. In 10 years, his income base grows to $244,335, and he begins receiving $1,017 per month for life.
Why Lifetime Income Matters
Let’s consider two retirees:
- Retiree A has $500,000 in savings and no annuity.
- Retiree B has $300,000 in savings and a $200,000 annuity paying $1,000/month for life.
If both withdraw $3,000/month to cover expenses, Retiree A is drawing down from their nest egg entirely. If markets perform poorly or they live longer than expected, they risk running out of money.
Retiree B, on the other hand, only needs to draw $2,000/month from savings since the annuity provides $1,000/month. That $300,000 can last much longer—and they have guaranteed income no matter how long they live.
Pros and Cons of Lifetime Income Annuities
✅ Pros:
- Guaranteed income for life
- Protection from market volatility
- Helps create a predictable retirement budget
❌ Cons:
- Less liquidity (your money is tied up)
- Potential fees and charges
May not keep pace with inflation (unless adjusted for it)
When Are Annuities a Good Fit?
Annuities are particularly helpful if you:
- Worry about outliving your money
- Don’t have a pension
- Want to cover essential expenses like housing, food, and healthcare
- Prefer peace of mind over managing investments
They may not be ideal if you:
- Need access to your money quickly
- Prefer full control over your investments
Already have sufficient guaranteed income from other sources
Conclusion
Annuities can play a crucial role in a retirement income plan, especially when it comes to providing lifetime income. While they may not be for everyone, for those seeking security and peace of mind, annuities offer a valuable way to ensure your income doesn’t run out before you do.
If you’re approaching retirement or already retired, it may be worth discussing with a financial advisor whether an annuity fits into your broader retirement strategy.
Need help figuring out if an annuity is right for you?
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