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Annuities and Annuitization Explained

If you have an annuity or are considering adding one to your retirement plan, it can be hard to get a simple explanation of how they work and what they can do for you.

You can always reach out if you have questions about whether annuities are right for you.

But for a quick and easy introduction, let’s take a look at two key decisions and why they’re so important to know: the type of annuity you get and when to annuitize.

How do annuities work?

Annuities work kind of like a reverse life insurance policy — instead of paying fixed sums to receive a lump sum later, you pay an insurance company upfront to receive fixed payments later.

In most cases, these payments are used as retirement income, especially for those without pensions or other guaranteed income sources for their golden years.

Types of Annuities

Immediate annuities let you start receiving payments immediately, while deferred annuities allow you to set up a future date to start receiving payments.

Annuities also differ based on payments. A fixed annuity guarantees a specific interest rate for returns, while a variable annuity can have higher or lower rates based on your investment’s performance over time.

When to Annuitize (and Why it Matters)

When you annuitize determines when you start receiving payments, which in turn can influence how much each payment will be. Therefore, the “right” time to annuitize is different for every person.

Here are some questions you can ask yourself to get a better idea of whether an annuity might be worth looking into and what might be the right time for you to annuitize:

  • What other income sources will you have in retirement?
  • Does your starting budget need time to grow?
  • Roughly how much would your payments be? Compare sooner or later time periods you could annuitize.

Are you considering an annuity in your financial planning? Get in touch to discuss your retirement strategy.

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