If you’re currently planning for retirement, you may have already heard about annuities. But if you’re still a couple of years away from retiring or even thinking about retiring, you might not have much of an idea of what an annuity is.
When the decision to retire finally comes around, though, it’s essential to understand that you’ll need to have as many streams of income as possible. Unfortunately, saving for years and cashing out investments might not be enough to give you the income you need to live, as many people may expect retirement to last 20 to 30 years.
Annuities can offer a steady stream of income, and they can come in a variety of different packages. Let’s take a look at annuities and how they can serve your retirement.
What Are Annuities?
In straightforward terms, an annuity is a financial product you can buy, typically from your life insurance company, that will pay out a regular income. The income you receive is determined by the type of annuity you purchase, how much money you pay for that annuity, and several other factors we’ll get to in the next section.
You can even choose when you get your payments, from monthly, to annually.
Your insurance company guarantees your income by pooling the money invested in annuities from you and other clients of theirs and making conservative investments, generating income that will last you the rest of your life, or set term period.
The type of annuities you can buy could include:
Life annuities are the simplest to explain. You buy a life annuity in a lump-sum payment, and your insurance company provides you with a regular income based on that payment for the rest of your life.
For example (as provided by the Government of Canada), you can spend $100,000 on a life annuity at 65, and your insurance company will pay you $500 for the rest of your life. There are further options you can choose to determine if a beneficiary will receive future payments after you pass away, but these might come at an extra cost.
Term-certain annuities are designed to provide you with an income for a set term. The longer your term is, the less money you will receive monthly. If you pass away before your term expires, the annuity can be paid out to a beneficiary until the term ends, if the annuity is designed to do so.
Variable annuities are riskier than the other types of annuities, but they could present the most reward. When you buy a variable annuity, you will receive a fixed amount of money monthly, but it is generally less than what you’d make with the other types of annuities. However, you will also receive a variable income that will fluctuate based on how well the market performs.
What Could Affect Your Annuity Income?
As we mentioned earlier, several other factors could affect the income you may receive. Insurance companies may calculate this number from:
- Your age
- Your gender
- Current interest rates
- How long you get payments (with term-certain annuities)
- Options you add (like a joint annuity for you and your spouse)
- Your health and life expectancy
Annuities are also a taxable income, but you may be able to defer payments if you purchase your annuity with after-tax dollars.
Strategies for Buying an Annuity
Annuities are significant investments that you’ll need to plan for. Some of them can cost thousands or hundreds of thousands of dollars, but they can provide some much-needed money when you’re enjoying your golden years.
Here’s what you need to know before you finally decide on buying an annuity:
- Know when to buy. Buy an annuity too young, and you won’t add too much to your income; wait too long, and insurance companies might not let you buy.
- Different insurance providers offer different annuity rates and prices.
- Only pay for options that make the most sense for you.
- Ensure your annuity keeps up with inflation.
- If your insurance company goes out of business, Canada’s insurance protection organization Assuris will protect your payments 100% up to $2,000 a payment and 85% of any payment over $2,000.
- Do not put all of your savings into your annuity.
- Annuities are contracts with your provider and very difficult to leave.
Retirement is a massive decision and a goal you’ll be working towards for the rest of your life. Make sure you’re financially stable for retirement, as debts and fees can have an impact on the life you may want to live.
If debt is hanging over your retirement, be sure to call our professionals today.