How income annuities could help with spending
At its most basic level, an annuity is a contract between you and an insurance company. The contract can shift certain risks—such as longevity or market volatility—away from you and onto the insurance company. This depends on the type of annuity and any guarantees it may include.
While there are many different types of annuities that can help build income either prior to or in retirement, a fixed income annuity can provide guaranteed income in exchange for a lump sum investment. Payments can be either for a set period of time or for life. Income annuities can also come with optional features, such as a cost-of-living adjustment (COLA) to combat inflation, or a cash-refund guarantee to your beneficiaries in the event that you die prematurely.
Someone approaching retirement could purchase an income annuity to supplement the portion of their income devoted to essential expenses, for example, if they’ve identified a gap that other sources of dependable income such as Social Security or a pension may not cover. By providing a baseline for these expenses, an income annuity could potentially allow them to spend more freely from the part of their portfolio devoted to nonessential expenses.
Keep in mind that fixed income annuity contracts are generally irrevocable after a “free look” period, meaning your money can’t be refunded.
Good to know: There are other types of annuities that can help you develop a diversified income plan. In all cases, since an income annuity’s guarantees are subject to the claims-paying ability of the issuing insurance company, it is important to do your research and choose an annuity issued by a financially strong insurance company.
You can find out more about annuities in Viewpoints: Understanding annuities
It’s a good idea to consider consulting with a financial professional who can discuss the pros and cons of the different types of annuities. That way they can help you design a plan that includes guaranteed income tailored to your needs, potentially giving you the confidence to enjoy the retirement you’ve worked so hard to achieve.