An income annuity works by converting a large sum of cash into a stream of regular payments. You give them money to an insurance company. And in exchange, the insurer agrees to pay you for a certain length of time — or the rest of your life.
You may receive your annuity payouts monthly, quarterly or yearly, depending on your contract.
Because your regular payouts from the insurance company begin within a year, income annuities are often called immediate annuities.
What is an income annuity?
Annuities may protect you from the risk of running out of money in retirement. They also may protect you from the risk of not being able to:
- Maintain your lifestyle in retirement
- Spend on what you want, when you want
- Take withdrawals when needed from your savings without worry
- Leave a legacy for what’s most important to you, whether it’s your grandchildren, a charity or something else
Who Benefits Most From Income Annuities
The strategy behind an income annuity is to create a steady stream of income for a retiree that cannot be outlived. In effect, an immediate annuity may act as longevity insurance. A good rule of thumb is that payments backed by an income annuity should replace a retiree’s wage payments until they pass away.
Another strategy utilizing an income annuity is using them to provide income to pay a retiree’s expenses—such as rent or mortgage, food, and energy-assisted living facility fees, and insurance premiums, or provide the cash for any other recurring payment needs.
The Freedom of Predictability
Outliving savings and investments is one of the fears in retirement. Putting part of your portfolio in an income annuity will provide you a paycheck for life and alleviate this fear. And just like the paycheck you had before retiring, this instils a healthy level of personal discipline, because you’ll have the regular payments that are coming in instead of one large amount. This may help you maintain your lifestyle in retirement.