The goal of retirement planning is to create a stable income that can provide for your needs (and wants) when you decide that you no longer want to work in a more traditional job.
It's tricky, though, find the right investments to provide that income stream. If you have a nest egg, you have to carefully consider how you will withdraw the money without overdoing it and reaching into your capital. But if the stock market is having a bad year, and your nest egg contains stocks, you might find yourself using your capital anyway.
Because of the recent upheavals in the financial markets, many retirees, and soon-to-be retirees, are reconsidering annuities.
What are Annuities?
An annuity is a financial product that provides you with regular income. You purchase the product, and you are promised a certain amount of income each month or year.
You can receive this annuity payment until you die, or you can specify a limited period of time to receive annuity payments. Many retirees prefer to receive the annuity payments until they die, which means that the pay out might be a little bit smaller, but there's no need to worry about running out of money.
There are two main ways to fund an annuity. On the one hand, you can pay into the annuity for a number of years. Once you are ready to retire, you will have built up a sizable amount of money, and your payouts are based on the money you've built up.
Many retirees, though, prefer what is known as an immediate annuity. With this arrangement, you use a lump sum to purchase the annuity. Your payouts start immediately.
Most annuity payouts are based on how much money you use to buy the annuity, as well as a risk assessment that determines how long you are likely to live.
Should You Get an Annuity?
There are many annuity products available. Fixed annuities. Variable annuities. Hybrid annuities. Annuities connected to stock index performance. You need to realize that annuities aren't for everyone, and research is a necessity before you buy.
Many annuities come with high fees, as well as complex beneficiary rules. If you aren't careful, you might end up destroying a large portion of your value, or tying it up in a way that works against you. Some annuities come with unfortunate tax consequences.
Not all annuities are bad, and there are some that can provide you with peace of mind. However, you should be careful. Look for an annuity with simple terms, and get the opinion of a trusted financial professional who won't receive a commission if you choose one annuity over another.
For some retirees, it makes sense to convert a portion (but not all) of a nest egg into an annuity. This portion of the retirement portfolio can provide stable income, while the rest of the portfolio has time to continue growing. When used properly, an annuity can be a hedge against other losses in the retirement portfolio.