Retirement isn’t supposed to be stressful. But for many people, the question of whether they’ll have enough savings can be a source of lingering concern.
Retirement plans such as 401(k)s and Social Security are two of the most common sources of income during retirement, but there’s another, often underutilized approach that can serve as a powerful complement to traditional retirement income: annuities.
What is an annuity?
An annuity is a financial vehicle that provides guaranteed and regular payouts according to a consistent schedule. Annuities can be purchased either with a lump sum payment or a series of payments over time. Unlike with a 401(k), for example, there is no risk of running out of money: The payments are guaranteed for the entire life of the annuity.
Another great benefit of annuities is their flexible structure. Some annuities begin payouts immediately, while others don’t begin paying out until a future date. Some offer payments for a fixed period, while others guarantee payments for life. These options make annuities an attractive solution for a range of different scenarios — whether you’re not planning to retire for decades or you’re preparing to transition soon.
Understanding common annuity structures
There are two main categories of annuities — and the structure you select will depend on your unique circumstances and goals:
● Fixed annuity — This kind of annuity offers a guaranteed payout that will not change. This typically means that the funds will be invested in a secure vehicle such as Treasuries.
● Variable annuity — Under this structure, the insurer invests in a portfolio of mutual funds and the payout is determined by the returns. A variable annuity may produce larger payouts than a fixed annuity if returns are positive, but it may also result in the loss of the principal.
In addition to the market structure of the annuity, there are also differences in the structure and timing of the payouts:
● Immediate annuities — A buyer makes a lump sum payment and begins receiving payments immediately. These payments may continue for a fixed time period, or for your entire life.
● Deferred annuities — A buyer makes a lump sum payment but does not receive payouts immediately, which allows the funds to grow over time. Deferred annuities may be either fixed or variable.
Diversifying your financial plan with annuities
As financial planners, we often talk about the benefits of a diversified investment portfolio. A retirement plan is no different — and annuities can be a powerful way to provide a distinct source of income.
The guaranteed return of fixed annuities can be an appealing choice for those who don’t need a large return but who desire the security of knowing they’ll receive a guaranteed payout — one that can last for the rest of their life and will never run out.
At Price Financial Management, we work with clients to develop retirement strategies that generate consistent income and provide peace of mind. Get in touch with us today to learn whether an annuity may be a smart strategy to integrate into your overall retirement plan.