What is a Retirement Annuity?

Patrick Lynch

A retirement annuity is a product that is designed to help someone live comfortably after he or she retires. As the life expectancy of humans increases, the number of years spent in retirement continues to grow. When someone retires, he or she no longer has a regular source of income from work on which to depend. An annuity provides him or her with this income and ensures that he or she doesn’t outlive his or her assets.

Annuities are financial contracts with insurance companies that can help people save money for retirement.
Annuities are financial contracts with insurance companies that can help people save money for retirement.

It also can be described as a contract between an individual and his or her insurance company. As long as the individual makes contributions to his or her retirement annuity fund, he or she will receive future income. Annuity rates vary depending on which insurance company provides the annuity as well as the type that is purchased.

A fixed retirement annuity is considered to be one of the most reliable plans available. It allows someone to choose an annuity for a period of time of his or her choice, and it is free from taxes until the money is withdrawn. Depending on the insurance company, a fixed annuity will give the individual a guaranteed principal sum. This basically means that the individual's assets will not be at the mercy of the stock market and its fluctuations, nor will the annuity ever decrease in value. The problem with this annuity is that the rate of growth is quite low in comparison to other annuities.

An immediate retirement annuity allows retirees to use their assets to create a regular income for the rest of their life. Funds from defined contribution plans and Individual Retirement Arrangements (IRAs) can be used to start a pension the moment someone retires. An immediate annuity also offers savers a regular payment, whether it is monthly or annually. One major flaw with this plank, however, is that immediate annuities have no cash value after they have been purchased. This means that no other payments are available, except those available under the terms of the contract.

Those who are willing to risk their pension fund in order to dramatically increase its value might look at a variable retirement annuity. This involves taking money set aside for retirement and investing it in stocks and bonds. Although there are guarantees available that can keep losses to a certain level, those who possess only a moderate retirement fund generally are advised to steer clear.

A fixed retirement annuity seems to be the best choice for those hoping to save money for their twilight years. Variable annuities offer excitement but are an imprudent investment for those who are not wealthy. A stable retirement annuity is essential to ensure that the later years of someone’s life can be the most enjoyable.

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