Posted March 17, 2023

By: Mae Yang

Retirement Income with Annuities

Even with increasing inflation rates and an uncertain market, annuities remain a reliable option for retirement income. Many people are worried about their retirement savings surviving the current market volatility. Although annuities can safeguard clients against rapid market changes, they are often excluded from conversations as they are not widely known and can be difficult to comprehend. This is why, during Annuity Awareness Month, we would like to answer the frequently asked question: What exactly is an annuity?

Understanding Annuities

An annuity is a financial product that acts as an accumulation vehicle. In simple terms, it can provide steady cash flow during retirement, protecting clients from outliving their assets.

An annuity operates like life insurance, where clients choose to deposit money into a policy, which is paid back with accumulated interest at a certain point. Unlike life insurance, annuities are paid to the owner at their retirement to guarantee an income for their retired life.

Annuities have two phases: the accumulation phase, where the client funds the annuity, and the distribution phase, where payments to the client begin. Since the purpose of an annuity is to fund retirement, they are considered illiquid vehicles, meaning funds cannot be withdrawn early without incurring hefty surrender charges or fees.

The Types of Annuities

There are different types of annuities based on how they accumulate and distribute, each with unique features that can support various lifestyles. In general, there are two main accumulation types: fixed and variable, and two main distribution types: immediate and deferred.

Fixed and Variable Accumulations

The accumulation phase is related to how the policy grows its funds. Fixed annuities have a fixed interest rate and are not tied to the stock market. Variable annuities, on the other hand, are based on stock market performance and give owners the chance to receive more significant payments if their investments do well. Although the cash flow is less stable, it allows for better rewards. To safeguard against this risk, there are hybrid annuities, such as the Fixed Indexed Annuity.

Fixed Indexed Annuities provide annual interest based on a specific index tied to the market. Interest is invested in one of several indexes, most commonly the S&P 500. This is not a direct investment in the market and remains a great option for those who want protection from market downsides.

Immediate and Deferred Distributions

The distribution phase is related to when payments begin. Immediate annuities provide payments directly after a lump sum deposit into the policy, typically a month at a time, for the rest of retirement. If the owner dies before the entire amount is paid, the rest will go to their beneficiaries.

Deferred annuities, in contrast, begin payments only after the owner reaches a specific age stated in the annuity contract. At the appointed time, the owner can choose to receive the income stream or the accumulated amount.

Consult with a Financial Expert

If you have never heard of annuities before or do not entirely understand them, you are not alone. Many people do not know every financial option available. This is why financial advisors can help put together educated financial plans. Suppose you are looking for a steady income stream in retirement. In that case, you should speak with a financial expert about annuity options today.