Annuities can be confusing, and there are a lot questions about them. What Is an annuity? Is it insurance? What are the benefits? Sammy Yim, State Farm agent in Burlingame, California, is here to help with some answers. Yim explains annuities as “very simple insurance contracts. Their main purpose is to protect you from outliving your income.”
Keep in mind, the following information pertains to fixed annuities only. Variable annuities work differently and have more of an investment risk component.
An annuity is a retirement-based investment product designed to generate income payments for the owner. Yim explains, “Annuities were created to provide protection against outliving your income. Because they offer guaranteed lifetime income, annuities might be a great way to prepare for retirement.”
Guaranteed Retirement Paycheck
Annuities can help replace a paycheck when you retire, and Yim suggests looking at your future fixed expenses. “When I meet with customers to help them decide how much to spend on their annuity, we look at what their fixed and variable expenses will be in retirement. Fixed expenses are costs they know they’ll have every month, like rent, utilities, and food. Variable expenses include things like traveling, golfing, spoiling grandkids, the fun stuff.
“An annuity can help make sure their fixed expenses are covered. It’s a safety net to assist in paying their bills. Then they can invest some of their retirement money more comfortably in other things, knowing their fixed expenses are taken care of.”
Other Benefits of Annuities
Annuities also provide a lot of flexibility. “They can be purchased in one lump sum or with a series of payments over time. You can also choose an immediate annuity, which generates income immediately after purchase, or a deferred annuity, which allows your investment to grow until you decide to start receiving income payments at a point in the future. You’ll have a variety of payment options to choose from too.
“Plus, annuities purchased outside of a qualified retirement plan, like an IRA or 401(k), provide tax-deferred growth prior to receiving income payments.”
The What Ifs of Annuities
Many people have questions about passing on annuity payments to family members. “People wonder what will happen if they die too soon. Well, your annuity payments don’t have to stop when you do. You can choose from a variety of payout options. For example, selecting a lifetime annuity with a ten-year guaranteed option provides payments for the rest of your life or ten years, whichever is longer. You can also choose who would receive the annuity payments in your absence.”
Should I Look into an Annuity?
The best way to know if an annuity is right for you is to have a conversation with your agent or a trusted advisor. “With all the options available, sitting down with someone who can help you sort it all out is key to deciding if an annuity makes sense as part of your retirement plan.”