Whether you are near your retirement age or just starting your career, sometimes your savings, retirement plans, and finances may make you anxious. As a result, you start looking for the right lifetime income products in addition to your retirement plans. An annuity is one such lifetime income product that will help you financially secure yourself in retirement investment. Originally annuities were designed for people who were retiring and, therefore, needed a fixed monthly income. So, why not add it to your retirement plans? If you are planning to add annuities to your retirement investment, here is everything you need to know:
An income annuity, also known as immediate payment annuity, is considered one of the most secure income streams for the future. In this type of annuity, a person enters into a contract with a life insurance company where the insurer agrees to pay fixed monthly income in exchange for a lump sum amount of money. The person starts receiving income as soon as the policy is initiated—further, the fixed amount of monthly payments guaranteed for a lifetime or a specified number of years.
FIXED VS. VARIABLE ANNUITIES
Both of these annuities are based on the interest rate on money invested with the insurance company. Fixed annuities guarantee a specific rate of interest in total investment in the contract with the insurance company. On the other hand, in variable annuities, interest rates fluctuate based on the owner’s investment portfolio for the annuity, which is why fixed annuity returns are more predictable than variable ones.
HOW AN INCOME ANNUITY WORKS:
You will get a monthly payout amount for a lifetime or a specific period. That amount decided is based on various factors, including your age, interest rates, life expectancy, gender, and the amount of capital invested. Annuities pay you out the full principal amount and the decided interest by the end of a specified period. For example, if you have invested your money for a period of 10-years, the monthly payment amount is calculated based on your principal amount and total interest to be earned in 10 years. Further that amount is divide into 120 monthly payments, if you want to add an annuity as a lifetime income product.
The monthly payment amount is based on the number of months between your current age (at the time of purchase of annuity) and your life expectancy. Suppose your current age is 60 years, and your life expectancy age is 80, then your monthly payment amount is based on 240 months. And if you live beyond 80 years, then your monthly payments continue.
WHAT SHOULD BE THE BEST AGE TO ANNUITIZE YOUR CAPITAL?
Remember that the longer you wait, the higher the monthly payment amount you will get in order to secure yourself financially. Therefore, if you want to maximize your monthly payment amount, a later period is the best option to annuitize your capital.