An income annuity is a financial product that can provide a steady stream of income during retirement. In this way, you can create a reliable source of income that can help you cover essential expenses and enjoy your retirement years. Here you can go over how income annuities work, explore the different types available, and help you determine if an income annuity is the right choice for you. Questions? We are here — and have third-party resources to help you directly.
An income annuity is a financial product designed to convert a lump sum of money into a guaranteed stream of income payments. Often purchased by retirees or those nearing retirement, it can replicate a steady paycheck, regardless of market fluctuations.
Income annuity payments can be structured in a few different ways:
Once you choose your income structure, the payout amount is determined based on multiple factors, including your age, the amount you invest and current interest rates (more on that later).
Income annuities are usually a type of immediate annuity. As the name implies, immediate annuities begin making payments shortly after the purchase, usually within a month. Deferred income annuities, on the other hand, allow you to grow your money over time before receiving income payments at a predetermined date in the future.
Income annuities are usually a type of immediate annuity. As the name implies, immediate annuities begin making payments shortly after the purchase, usually within a month. Deferred income annuities, on the other hand, allow you to grow your money over time before receiving income payments at a predetermined date in the future.
Income annuities work by converting a hefty up-front payment — or a series of payments — into a set of guaranteed income payouts. These payments can begin immediately or at a deferred date.
There are two main types of income annuities:
Income annuities, like most financial products, have their strengths and their drawbacks. While these contracts offer a way to replicate a paycheck in retirement, they come with fees and restrictions you should be aware of before moving forward.
The size of the payouts you can expect from an income annuity depend on your age, your initial investment amount and current interest rates.
First, the larger your initial investment, the higher your monthly payout will be. You’ll generally need to commit $100,000 or more to generate any kind of meaningful payout in retirement. Higher interest rates also generally translate into higher annuity payouts.
Meanwhile, younger individuals typically receive lower payouts due to their longer life expectancy. The specific income option you choose (lifetime, period certain or joint-survivor) will also impact your payout amount. For example, the joint-survivor option will always result in lower payouts, since payments need to last the life of two people instead of one.
There are online annuity calculators that can help estimate potential payouts based on your specific circumstances. However, it’s always smart to consult with a financial advisor to determine the most suitable option for your retirement goals.
If you’re risk-averse with a low tolerance for market fluctuations, income annuities can provide a guaranteed income stream while shielding you from the turbulance of the stock market. They can also be a suitable option if a long life expectancy runs in your family and you expect to live a long time in retirement.
However, it’s essential to weigh the potential drawbacks before committing to an income annuity. Accessing the principal amount is usually restricted and often comes with high surrender charges. This gives you less liquidity compared to other investment options.
If you’re interested in purchasing an annuity, financial experts generally recommend allocating a portion — but not all — of your retirement savings to the annuity. A good rule of thumb might be 10-20 percent of your retirement nest egg. This ensures you remain diversified with multiple income streams that include Social Security and 401(k) savings, as well as annuity payouts.
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Reference: [https://www.bankrate.com/retirement/what-are-income-annuities/#frequently-asked-questions]
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