What Is a Retirement Annuity?

What Is a Retirement Annuity?

Retirement With a Paycheck

How much money will you need to retire? It can be a tough question. Even if you’re pretty certain what your expenses will be and how much “fun” money you’ll want, one of the biggest questions is how long you’ll need it for, because none of us know how long we’re going to live.

Since Social Security often isn’t enough to cover the retirement you envision, most people also depend on other savings and retirement accounts to meet their retirement goals. One of these account options is an annuity (sometimes referred to as a retirement annuity).

Patrick Blevins, a State Farm agent in Waynesboro, Virginia, is here with some tips on how annuities can help build a financially healthy retirement.

Keep in mind, the following information pertains to fixed annuities only. Variable annuities work differently and have an investment risk component.

How They Work

Blevins explains them pretty simply, “A retirement annuity is like having a paycheck in retirement, that you’ll continue to receive no matter how long you live.”

An immediate annuity is purchased with one lump sum, and you start receiving payments pretty much right away. Some companies also offer deferred annuities, where you purchase your annuity with a lump sum but choose a time in the future to start receiving payments. The general goal of both is the same though – to receive payments for the rest of your life.

Guaranteed Paycheck – For Fixed or Fun

Blevins sees people use annuities in various ways. “Some people use annuity payments to help cover their fixed expenses that Social Security doesn’t cover. For them, it’s a paycheck to help continue in a comfortable lifestyle. Others have their fixed expenses covered already and use annuity payments for the fun stuff, like traveling or pursuing hobbies or spoiling their grandkids.

“It can also prevent people from overspending. When you’re retired, every day can feel like a Saturday, and most of us spend more money on the weekends. So putting some of your money into an annuity, instead of having it all readily available, can offset the risk of spending.”

What Are My Payout Options?

There are a number of different options you can select for your payout period depending on what best meets your needs, and Blevins talks about some of the most common choices. “Probably the most common is the life annuity with cash refund option. With this option, if you’re still living once your initial investment has been paid out to you, you’ll keep receiving the same monthly payment for however long you live. If you don’t outlive your initial investment, your beneficiary will receive a lump sum payment based on whatever portion of the initial amount wasn’t paid out to you, so it guarantees the return of principal.

“Period certain options are popular too, where you or your beneficiary is guaranteed to receive payments for a specified number of years. If you live past that date, you’ll still continue to receive payments for the rest of your life.”

Learn More

A retirement annuity could be a helpful part of your overall retirement plan. To learn more and decide if an annuity makes sense for you, your own local State Farm agent is here to help.