Retirement planning can help you feel confident that you’ll have sufficient income to support your lifestyle after you finish your career. While there are a variety of retirement options to choose from, annuities are one of the best for ensuring you won’t run out of money during your lifetime. Additionally, annuities can help avoid debt in retirement. Read on to learn more about annuities and how they can help you prosper in the future.
What Is an Annuity?
An annuity is a contract you make with your insurance company. You provide either a one-time payment or a series of smaller payments that the insurance company eventually pays back to you, along with accumulated interest. While you can use an annuity to structure your income at any point, like in the event of inheritance, a legal settlement, or lottery payout, annuities are most commonly used for retirement.
How Does an Annuity Work?
When creating a retirement annuity, you have many options in terms of interest rates, payout periods, beneficiary designations, and more. It’s important to understand how your specific annuity works so that you’re protected in retirement and won’t go into debt because of a miscalculation of your disbursement amounts or the length of the contract.
Most retirement annuities are deferred annuities, meaning payout begins at a specific date in the future rather than right away. You can also choose whether you want your annuity to payout over a specific number of years or for the rest of your life.
Finally, you have a choice in how the insurance company invests your money. Fixed annuities guarantee a specific disbursement amount that won’t rise or fall based on the performance of the stock market. In comparison, variable annuities respond to the stock market — if it rises, your payouts increase, and if it falls, your payouts decrease. Indexed annuities combine fixed and variable annuities by guaranteeing a certain amount per payout but with the possibility of higher payments if the stock market performs well.
Can an Annuity Help Avoid Retirement Debt?
Annuities can be incredibly helpful tools for avoiding debt in retirement. Since an annuity guarantees an income for a set period of time, you can create a budget reflective of that income and feel confident that you can pay for your expenses. However, some annuities are better than others for guaranteeing long-term financial security in retirement.
If you’re concerned about outliving your disbursements, opt for a lifelong contract rather than a year-based contract. This way, you know you’ll receive an income as long as you live. If you want to leave something to beneficiaries, a set number of years is the better contract. If your contract hasn’t ended after you pass, whatever money remains in your account passes on to your heirs.
Consider a fixed or indexed annuity if you want consistent disbursements. Both plans guarantee a certain amount of money per payout, which can help you manage bills and avoid debt more easily.
Annuities are useful tools for structuring consistent and guaranteed retirement income. Consider setting one up with your insurance company to ensure that you’ll have plenty of money to live on after you retire.