Nov 12, 2021 4 min read

With the low interest rate we are receiving from our banks, living off of savings has been extremely difficult for a lot of people. Some people in their retirement phase of life have either had to cut their lifestyle, gone back in the workforce or relied on family and friends for financial support.

When planning for retirement remember Social Security was only designed to replace 40% of your income. A steady and guaranteed flow of income will be needed to make retirement years less stressful.

To provide this guaranteed flow of income, annuities were created. Sometimes referred to as a life annuity, an annuity is an insurance contract you purchase that guarantees you’ll receive a specified amount of money every month for the rest of your life, no matter how long you live. Think of an annuity as the opposite of life insurance. You buy life insurance if you die too soon, while annuities provide a safety net for living a long life.

At its core, an annuity is purchased either by saving money over a period of time or by purchasing an annuity with a lump sum. If you do not need the income today, you purchase a deferred annuity. If you want income now, you purchase an immediate annuity.

Your next decision will be how the money in your annuity is invested. If you are completely averse to risk, you invest in a fixed annuity. A fixed annuity is an insurance contract that promises to pay the buyer a specific, guaranteed interest rate on their contributions to the annuity. When purchasing a fixed annuity pay close attention to the rates being paid now and the rate guaranteed to be paid in the future. Ask when can the rate being paid now change and what is the lowest rate it can go to.

Now if you are not averse to taking risk, which is simply code for investing in the stock market, you purchase a variable annuity. A variable annuity pays interest that can fluctuate based on the performance of an investment portfolio chosen by you. If choosing an investment portfolio concerns you, remember that you can get help. All marketers of variable annuities are licensed to sell securities. They have the fiduciary responsibility to do what is in your best interest. They use tools such a risk tolerance and suitability reports. These tools ask you questions such as your investment history, when you will need the money (time horizon), your reaction to changes in your investment values. These reports should be shared with you and reviewed periodically to make sure they still reflect your individual thoughts and concerns about investing.

The most common concern people have about annuities is that if they die all their money goes back to the insurance company. This is true if you purchase a pure life annuity. Annuities are offered with different features depending on your needs. There are annuities with period certain guarantees; they guarantee life income to you and the same income to a beneficiary for a period of years when you die. There are annuities that refund account values to a beneficiary or have guaranteed death benefits. There are joint annuities providing life income to two people. Understand there is a cost for adding benefits to an annuity, but these benefits enable you to provide the desired security your loved ones may need.

An annuity is a contract with an insurance company. Not all insurance companies are the same. Always deal with a company that has a rating from the four major rating services and compare the ratings between companies. You are buying a contract that can be required to pay benefits 30 or 40 years into the future – make sure you are dealing with a company that has the financial resources to fulfill that contract.