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What is an annuity is a question my customers ask me quite a bit. Many clients get to a point that they want to maintain their level of income after retirement instead of digging into their nest egg every month to pay bills and to maintain their lifestyle. However, few know exactly how to do this and what is involved.
What is an Annuity?
An annuity is a financial instrument that allows you to basically pay for an income. You can pay for this product with a onetime payment or you can contribute over time like an IRA or 401k plan. In its simplest of terms, you are paying a bank a million dollars and asking them to give you back $100,000 per year for 10 years. Of course, I have taken interest out of the equation to make it simple to understand.
There are many ways to structure an annuity and one way is not necessarily better than another. Some of us contribute monthly to our annuity long before we are ever going to see a return payment. The benefit of this is my money will grow every month from my contributions and of course the interest my balance is earning every day. Thus when I’m ready to retire I should have a pretty large balance that will be distributed back to me. In this situation, I’ll have the opportunity to take payment every month for a set period or to take payments every month for the rest of my life. This is the main advantage to annuities over any other form of retirement plan. With my annuity providing monthly income, I will never run out of money for as long as I live.
Another type of an annuity is a single premium, immediate annuity. This is a great option for someone that has just retired and is more comfortable having monthly income for life as opposed to a large nest-egg. Instead of contributing monthly to the annuity fund, you can give the annuity company a single lump sum payment and begin taking your monthly income immediately. This is especially helpful for someone that owns a small business or is at risk of a lawsuit. If your money is in a bank account or the stock market, it can be seized. However, your monthly annuity payment is pretty much untouchable by anyone except the federal government for tax purposes.
For this reason, you can use annuities to secure your retirement. You won’t have to worry about a lawsuit or large medical bills taking your entire nest egg away from you overnight. With the annuity the monthly checks will come every month for your entire life. There are very few exceptions to this, so you should consult with an attorney and a financial accountant before you make the move.
Finally, there is one more type of annuity that is beneficial to a lot of families. There are multiple life annuities that are perfect for married couples. With this type of an annuity you receive smaller monthly payments, but the payments still come after you pass. Your spouse will receive the same amount of annuity income as he or she did while you were still around. This provides peace of mind that you know your spouse will be taken care of for the duration of their life as well.
I hope this post answered your what is an annuity question and you now have enough information to decide if an annuity is right for you.
