Dear Young Financial Knowledge Grower, If you have been reading my past messages, you know that I am a big advocate for creating passive income streams. One form of passive income is an annuity. There are several types of annuities. Today, I am going to explain one type of annuity called an income annuity.
First, thanks for being here. I’m excited to share financial literacy with you. So, let’s get started.
Planning for Retirement
I believe that you should start planning for retirement from the beginning of your work life. What you will be doing at the various stages of planning will not be the same. But, if you want to create the future that you want, you need to start the work necessary today. I am probably closer to retirement than you (but not necessarily if you are going for early retirement!) In any case, it was while doing some specific work on my on-going plan for retirement that I started looking at whether I want to invest in annuities.
What is an annuity?
An annuity is a financial product that is sold by insurance companies. They are contracts between the companies and their clients. The clients invest money in exchange for a guaranteed income. Years ago, I did not know much about annuities, and did not know that there are multiple types. Now, after doing some recent research, I determined that I am interested in an income annuity.
What is an Income Annuity?
An income annuity is an insurance contract in which you pay the insurance company a one-time lump premium and then you start receiving income payments. Some income annuities are immediate, meaning that you pay a lump sum premium and start receiving payments in a time period under a year. This type of annuities is referred to as a SPIA, a Single Premium Immediate Annuity. Some other annuities start paying at some point over a year in the future. Those types of annuities are called DIA, or Deferred Income Annuities. Also, depending on how the income annuity is set up, your monthly payments can either be fixed or variable. The income, once started, is guaranteed for life.
Income annuities are the most straight forward type of annuities. But, there are a wide variety of annuities. If you are interested in annuities, be sure to do your research and check with your financial advisors.
Why Am I Interested in an Income Annuity?
I am currently moving into the fine tuning phase of retirement planning. For those planning to retire at the current standard retirement age of 65, I suggest that fine tuning begin at age 50. If you are planning to retire early, I suggest that you start your fine tuning for your retirement plan 10 to 15 years before your target retirement date.
Income During Retirement
When considering your retirement, you want to have various streams of income coming from diversified sources.
Of those sources of income, some should be guaranteed and some will not be guaranteed.
Guaranteed Sources of Income?
There are three possible sources of guaranteed retirement income: social security, pension, and annuities.
By using the Social Security Administration website, I am able to get an idea of how much I will receive from Social Security each month.
Pensions are monthly retirement payments that some companies pay retired employees. (Know that at this point, most companies do not offer pensions. Also, the companies that offer pensions get fewer every year.)
After considering what I would be getting from the two above streams of guaranteed income, I am thinking that I might want to increase the amount of guaranteed money that I will receive each month, and I want to ensure that I don’t run out of money if I live for a long time.
So, I decided to consider…
Buying Some Retirement Income With an Income Annuity…What Determines the Amount That You Will Receive Each Month?
The main things that determine how much you annuity pays include:
Whether you want an immediate annuity or a deferred annuity that will start to pay you over a year later.
- How much premium you chose to pay
- Your age
- Your gender (Women tend to live longer than men.)
- The current interest rate
- After considering the above factors, the insurance company can tell you how much you receive each month.
So, there you have it…income annuities
Important
Note that an annuity is not an investment, it’s insurance. The income annuity is insurance that you will receive that stream of income for life. So, I don’t consider it as a replacement for my investments. Instead, I consider it as a stream of income in addition to the income that I will receive from my other guaranteed income and my investments.
You may not be close enough to retirement to consider what I am considering regarding annuities. But, hopefully you have at least a better knowledge of what an annuity is and how one could play a role in your future. Remember, knowledge is power.
Key Takeaways About An Income Annuity
- An annuity can be one part of your retirement plan.
- Annuities are insurance products.
- Annuities create guaranteed streams of income.
- There are many types of annuities.
- Things that contribute to how much an annuity pays include: the premium, your age, your gender, the interest rate, and whether you want an immediate annuity or a deferred annuity.
- Annuities are not investments. They are a form of insurance (income insurance.)
So, there you have it… income annuities.
Thank you for reading this. I love spreading financial literacy. By reading this, you are helping me with my goal of spreading it to as many people as possible.
And don’t forget to subscribe to the Rich Mom Poor Kid Blog, in order to continue to build your financial literacy!
Hugs and Best Wishes On Becoming Healthier and Wealthier,
Rich Mom
If you are interested in reading more about passive income, check out:
Earn As Much Interest As Possible
Start Creating Passive Income Today
Looking for more on immediate annuities, there is a website: www.immediateannuity.com
Do you have money for investing, but not sure where to start, try Acorns
Not only does the Acorns App help you simplify and automate your investing, it also allows you to boost your investments using your spare change. I love it!
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Also, please note: I am not an investment advisor. Always do your own due diligence and research before investing. Check with your own investment advisor.
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