An annuity is a contract in which a lump sum payment or series of payments are made to an insurance company by an owner who in return obtains regular disbursements beginning either immediately or at some point in the future. The goal of annuities is to provide a steady stream of income during retirement to meet a specific goal, such as:
- Protect the principal
- Provide lifetime income
- Cover long-term care costs
- Leave a legacy
Even though annuities are commonly thought of as investments, they are not; they are contracts very similar to insurance contracts. Annuities became popular in the U.S. during the Great Depression when people began to worry about stock market volatility endangering their retirement. Today, with pension plans becoming less common, many retirees look toward annuities as an option to create guaranteed income streams for their retirement.
A closer look at annuities
Annuities work by providing limited access to funds each year in much the same way that income is received from Social Security. The most common annuity we see for retirement income is a Deferred Indexed Annuity, which means a premium is deposited in early years and income grows in the contract. At a future date, the annuitization begins for supplemental income during retirement.
People spend the majority of their lives trying to accumulate wealth for retirement but very little time planning how to use their money when they need it. While there are numerous options available for an individual’s retirement funds, annuities are the only vehicle that can provide a consistent and stable income stream.
In short, an annuity does what no other investment can do: provide guaranteed income for the rest of your life no matter how long you live.