Annuities are another way to save for retirement and senior living. Essentially you make payments or pay the premium for the annuity in full and at a later date you are guaranteed payments from the money you initially invested. That is of course, the simplified explanation.
There are a variety of annuities, a variety of payment or investment options, and even more options for the disbursement or pay out period. Deciding what type of annuity to invest in is really a matter of personal choice and requires examining what you need the funds for, how healthy you are, the age of death of family members, and so on. The life income annuity is one of the most popular annuities as it guarantees income for life.
How it Works
With a life income annuity you don’t ever have to worry about running out of money in your lifetime. Disbursement payments will continue at the set amount, even after the money you initially invested runs out, until your death. This works because annuities are much like insurance policies. Many people invest and the money goes into the pot so to speak, some people pass away before they’ve used up their initial investment, so the left over stays in the pot. Some people outlive their money and still get payments because they are drawing from the pot.
Investing in a life income annuity is popular because there is security in knowing that disbursements will continue each month at the same predictable rate. This allows retirees to budget and plan the finances accordingly.
Some people don’t like the idea of giving up their hard earned money if they pass away before they’ve gotten all of their money back through disbursements. In this case, an individual can purchase a rider or a policy that is a lifetime annuity with refund. The policy holder would appoint a beneficiary. If the policy holder dies before they receive all of their money, the beneficiary would continue to get disbursements until the money runs out. For example, if a person initially invested $50,000 and had gotten disbursement payments totaling $40,000 before they passed away, the remaining $10,000 would be paid out to the beneficiary. If no rider is purchased or no beneficiary is named, the left over $10,000 would go back into the “pot” mentioned earlier.
Annuity payments don’t take into consideration cost of living increases so the monthly amount you get now might not be enough in 15 years. Therefore, there is an option to choose an inflation adjusted annuity. This option increases the disbursement payment every year to account for higher living expenses. It’s not standard with annuity policies so it’s something you have to consider adding if it will be worth it to you.