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Most people fear that they will outlive their income and a pension plan may not cover their post-retirement expenses. If you have any funds in savings, CDs, IRAs, 401Ks or mutual funds, an annuity income works like a boon. It allows you to convert a certain percentage of your retirement funds into income payments periodically, either before or after retirement.

Annuity is an insurance product where you receive a fixed and guaranteed lifetime income on a monthly, quarterly, semi-annual, or annual basis. You can opt to receive these funds at retirement, after you retire or even before, as per your insurance contract.

What Happens When You Annuitize?

When you annuitize, you tell the insurance company to start paying you. When you make the choice to annuitize, you also decide how the payments should be structured. For example, you can choose a variety of options including:

  • Lifetime payments
  • Life with period certain
  • Joint and last survivor

Along with the flexibility an annuity income provides, you can be sure that your retirement funds will remain unaffected by stock-market fluctuations or market downturns. Your investment will be locked in and guaranteed against stock-market performance. It allows you to safeguard the money that you have set aside for the future, as well as budget for your current expenses in case you opt to receive the returns periodically.

Types of Annuities:

  • Deferred Annuities Income
  • Single Premium Immediate Annuity

Deferred Annuities Income

A deferred annuity income or a longevity annuity income is a great choice if you want to start your periodic payments from a later date (from two to thirty years deferred). A deferred annuity can be purchased either with a single one-time payment, or multiple payments over the years. In return, you (or a specified payee) will receive guaranteed periodic income payments, from the mentioned start date, for the rest of your life. You can choose to be paid monthly, quarterly or even annually and pick benefits designed to suit your specific requirements, regular expenses and predicted life choices.

Single Premium Immediate Annuity (SPIA)

Extremely useful for retirement planning, the single premium immediate annuity is an annuity contract where you pay a lump sum amount right away, and receive a fixed amount periodically for the rest of your life. Since you can predict how much you will receive from the annuity, you can plan your retirement better. With an inflation-indexed annuity and a higher initial premium, you can enjoy a risk-free payout that takes inflation into account, for the rest of your life. An SPIA does not cover your heirs, though, which is why it can offer such attractive terms of return. If you have no dependents or heirs, this could be the perfect plan for you.

Annuity incomes can also be set up with death benefits for your estate, but the policy issue age will depend on the type of plan and benefits you select, as well as the tax qualification of the money you use for it.

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