According to Investopedia, an annuity is “a contract between you and an insurance company in which you make a lump-sum payment or series of payments and, in return, receive regular disbursements, beginning either immediately or at some point in the future.” On episode 46 of the Adulting Is Easy podcast, I spoke with David Lau, who told me a bit about annuities.
According to David, his clients’ number one fear is that they will run out of money, and annuities are a way to ensure that does not happen. In a world where pensions are few and far between and social security benefits are becoming less and less certain, he says annuities should be considered.
Here are the three types we discussed:
Fixed: these annuities pay a fixed interest rate on the owner’s contributions
Variable: these annuities pay an interest rate based on an investment index chosen by the owner
Income: the owner purchases this kind of annuity with a lump sum, and immediately start receiving guaranteed payments for life. These are the least popular.
There are riders that can be added, like a life with period certain rider, which guarantees the minimum number of payments so that if the owner dies, the beneficiary would receive some benefits.
If you’re interested in learning more, do your research and contact a professional. These insurance products often come with high fees. However, they may have a rightful place in your retirement plans due to their economic and psychological benefits.