One of the biggest financial worries people face as they approach retirement is the possibility of outliving their savings. After decades of working, saving, and planning, it can feel unsettling to think that market downturns, medical expenses, or simply living longer than expected might leave you without enough money to maintain your lifestyle. This is where annuities can play an important role.
An annuity is a financial product designed to provide guaranteed income, often for the rest of your life. Think of it as creating your own pension: in exchange for a lump-sum payment or a series of contributions, the insurance company agrees to pay you a steady income stream. The major benefit is that no matter how long you live, you don’t have to worry about running out of money.
Why Consider an Annuity?
For many retirees, an annuity offers peace of mind. Unlike investments that fluctuate with the stock market, annuity payments are predictable and steady. This can make it easier to budget for essentials like housing, groceries, and health care. It also removes the stress of managing investments on your own during retirement years. An annuity essentially shifts the risk of running out of savings from you to the insurance company.
Types of Income Annuities
When it comes to choosing an income annuity, you’ll find several payout options that can be tailored to your personal goals. Each option balances the need for financial security with the desire to leave something behind for your loved ones.
1. Joint Life
This option covers two people, most often spouses or partners. Payments continue as long as either individual is alive, ensuring that the surviving spouse won’t lose income after the other passes away. It provides long-term stability for couples who want reassurance that both of them will be cared for financially.
2. Period Certain
A period certain annuity pays for a fixed number of years—10, 20, or another timeframe you choose. If you pass away before the term ends, your beneficiary continues to receive payments for the remainder of that period. This approach provides security for loved ones, but it does not guarantee lifetime income.
3. Life with Period Certain
This option blends the two approaches. You receive guaranteed income for your entire life, but if you die before the “certain” period is up, your beneficiary will continue to collect the remaining payments. It’s a way to secure lifetime income while also protecting your family in the near term.
4. Life Only
This option provides income for as long as you live—period. When you pass away, the payments stop, and there is no benefit left for heirs. Because it involves the most risk for the policyholder, it also comes with the highest payout levels. Retirees who are primarily focused on maximizing their monthly income often consider this option.
Points to Keep in Mind
While annuities can be a powerful tool, they’re not the right fit for everyone. It’s important to think carefully about your overall financial situation, your retirement goals, and your family’s needs. Some people prefer the flexibility of investments, while others prioritize the stability of guaranteed income. Costs, fees, and terms can vary widely among annuity products, so working with a financial professional can help ensure you choose the structure that aligns with your long-term plans.
Final Thoughts
The idea of outliving your retirement savings can be daunting, but annuities offer a solution that brings security and predictability to your financial future. By selecting the payout option that fits your life—whether it’s protecting a spouse, ensuring a set number of years for your family, or maximizing your own income—you can retire with greater confidence.
When combined with Social Security, pensions, and other savings, annuities can create a strong foundation for a retirement income plan that lasts as long as you do.
