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What is a retirement annuity?

No matter how long your retirement lasts, a retirement annuity may help.

Grandfather and child putting a puzzle together.

Determining if you have enough money for retirement can be challenging. Even with the best goal setting and planning, there are always uncertainties. You will need to consider things such as how long will you need a retirement income, what your lifespan will be, what events may happen once you do retire and many others. 

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 does a retirement annuity 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."

Annuity payment 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 about a retirement annuity

A retirement annuity could be a helpful part of your overall retirement plan. Learn more and decide if an annuity makes sense for you.

The information in this article was obtained from various sources not associated with State Farm® (including State Farm Mutual Automobile Insurance Company and its subsidiaries and affiliates). While we believe it to be reliable and accurate, we do not warrant the accuracy or reliability of the information. State Farm is not responsible for, and does not endorse or approve, either implicitly or explicitly, the content of any third party sites that might be hyperlinked from this page. The information is not intended to replace manuals, instructions or information provided by a manufacturer or the advice of a qualified professional, or to affect coverage under any applicable insurance policy. These suggestions are not a complete list of every loss control measure. State Farm makes no guarantees of results from use of this information.

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