Most people depend on a reliable source of income, regardless of their stage of life. A stable income provides some peace of mind and allows you to focus on other things. For people in retirement, annuities can help provide the peace of mind and security of a reliable income even when the paychecks from a job are no longer coming in.
Following is a quick look at two popular types of annuities, single premium immediate annuities (SPIAs) and deferred annuities:
Single Premium Immediate Annuities (SPIA)
SPIAs tend to be an attractive option for retiring seniors who prefer not to take risks with their money. In exchange for a lump sum payment, SPIAs guarantee a stream of payments that provide an immediate source of income. There are some SPIAs on the market that even allow for flexible access to your money when you need it. The benefits of SPIAs may include:
- A lifetime source of income
- Age rating (which allows for larger payments based on a person's life expectancy)
- A variety of payout options
- Inflation protection
- Riders offering higher payouts if you enter a nursing home
- Having access to your money when you need it (penalties may apply)
Deferred annuities are an option for retirees who don't need a source of income right away. They offer a way to pre-fund your retirement income. People looking for retirement income may find deferred annuities a better alternative to certificates of deposit (CDs). Deferred annuities offer a number of benefits over traditional CDs, including:
- Tax deferral. Unlike CDs, earnings in a deferred annuity grow tax deferred. Since deferred income is not included in the formula for determining the taxation of Social Security benefits, the income tax paid on Social Security benefits may be reduced or eliminated.
- Access to your money. Deferred annuities often have built-in liquidity features allowing easy access to your money when you need it.
- Avoiding probate. When beneficiaries are set up correctly, deferred annuities help avoid the hassle and expense of probate.
It can be easy to become overwhelmed with the variety of annuities available – or even determining if an annuity is the best option for you. A good advisor can help you determine what type of an annuity will pay off for you.