Annuities can be an attractive investment option for retirement planning. However, they are a bit more complex than your average investment. In fact, it isn’t simply a matter of picking a stock and buying shares. Annuities are contracts with insurance companies where you pay a premium now in return for a payout later. That means you’ll get back your principal investment, plus a degree of interest. One of the most important things about buying annuity policies is understanding the terminology that comes with them. One important term to know is the “annuity period,” which is when the annuity buyer begins receiving payments. For more help with annuities, consider working with a financial advisor.
Annuity Period, Defined
The annuity period is the time when an annuitant (person who owns the annuity) starts to receive payments. This is generally in retirement, and payments can come monthly, quarterly or annually. The exact details of the annuity period for your specific annuity will have been determined in the contract you signed when purchasing your annuity earlier in your life.
An annuity period can either be specific or open-ended. For instance, some annuities pay for the duration of a person’s life once the annuity period begins. Other annuities have a specific annuity period, perhaps 10 years. Again, these details come into play back when you buy your annuity contract. This also has an impact on how much of a premium you paid during that portion of your annuity contract.
How Annuity Periods Work
When the annuity period arrives for your annuity contract, you’ll start to receive money on a predetermined schedule. Again, the exact nature of your annuity period will go by the stipulations in annuity contract you purchased.
First, there is the determination of what your annuity payment will be. This is based on whether you bought a fixed annuity or a variable annuity. If you purchase a fixed annuity, your payments are predetermined and guaranteed when you buy the contract. On the other hand, the payouts for a variable annuity come from the market performance of the money you invest during your buy-in phase.
Beyond this, the factors related to your annuity period payout are determined based on the specific annuity product you buy. A period annuity is for a specific amount of time – perhaps 5, 10, 15 or 20 years. You’ll get a payout either monthly, quarterly or yearly for the length of that period. You can also purchase a lifetime annuity, which pays out for the rest of your life. These types of annuities are especially useful for retirement planning, as it can keep money coming into your account as long as you live. That’s true even if you live longer than you plan and your other retirement savings are running low.
There are a few other options to consider. A joint-life annuitization option can be good for a couple, as it keeps paying out until both members of a partnership have died. A lifetime annuity with guaranteed term pays out for life but also has a guaranteed term. Let’s say you purchase a lifetime annuity with a 10-year term, but die just five years into the annuity period. Your estate or surviving spouse will continue to get payments until the 10-year period is over.
Is an Annuity Right for You?
Annuities are a strong option for retirement planning, as they guarantee income even after you stop working. A recent study even found that those retirees with annuitized options feel more able to spend their retirement money – and enjoy their golden years – because of the psychological effect of seeing money come into their account each month.
Annuities do have some downsides, though. Variable annuities especially have the risk that a bad investment strategy will result in lower payments than expected. Annuities also don’t have the upside of some other investments, though they also carry less risk. If you’re considering using annuities as a part of your retirement planning strategy, a financial advisor can help you figure out how to best incorporate them into your investment portfolio.
The annuity period is the time when an annuity actually pays out to an annuity holder. The annuity period can last a specific amount of time or it can last for the rest of a person’s life. You fund an annuity earlier in life through one or more premium payments and guarantee income later in life. This makes them popular products with some retirement planners.
Retirement Planning Tips
For help with annuities or any other retirement planning questions, consider working with a financial advisor. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors in your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
The first step to retirement planning is often using a workplace retirement savings account. If you have access to a 401(k) or similar plan, make sure you take advantage.
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