Is your retirement income sufficient? Can you count on it being enough for life so that you will not run out of money when you reach old age?

If you haven’t answered these questions, it’s about time you do.

As one example, a survey by Schroders indicates that people expect to need an average of $1.1 million to retire comfortably, but only 24% expect to reach that threshold.

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In addition, 56% of respondents expect to save less than $500,000, including 36% who will save less than $250,000.

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Considering that people are living longer worldwide, that should shake you to your core. In fact, between 2020 and 2050, the number of elderly people aged 80 or older is expected to triple, reaching 426 million.

So, yeah. You’re going to need a solid nest egg. But, you also need a guaranteed income that you won’t outlive. That’s a tall glass to fill. However, a retirement annuity might just do the trick.

With a retirement annuity, you put money aside to receive an income in retirement. A schedule is outlined for the payment of this income. The payment is usually made monthly, quarterly, or annually.

Overall, in your golden years, you will have peace of mind knowing that you have a reliable income stream.

Buying a retirement annuity involves paying a premium. The premiums for retirement annuities are usually paid either in a lump sum or over time. But, this depends on the type of contract you sign.

Retirement annuities can be divided into three categories: fixed, variable, and indexed:

It is important to note that some annuities are immediate, meaning that payments can begin as soon as the annuity is purchased. With an immediate annuity, you pay the insurer a lump sum. These annuities are popular with older adults who want to ensure a regular income once they retire

Deferred annuities, however, are used in the long run. You don’t get your money until a certain date after paying in. You have the option of earning interest or profiting from market gains before that date.

The process of converting your annuity balance into income is known as annuitization. Your funds could remain invested indefinitely if your contract doesn’t require annuitization. In some cases, you may be able to take one-time withdrawals or designate a beneficiary to receive the money upon your death.

In the event that you choose to annuitize, you will receive income based on:

In the face of retirement, an entire generation feels unprepared and unequipped due to the lack of pensions. In fact, the amount of Americans retiring with defined benefit pensions today is less than one-third (31%). No wonder a study by the Insured Retirement Institute shows that only 25 percent of baby boomers think they will have enough money when they retire.

“Americans are living longer and face a variety of risks in retirement,” Michael Finke, a research fellow and dean, and chief academic officer of the American College of Financial Services, said in a 2018 news release introducing the Protected Lifetime Income Index research initiative.

According to Finke, most retirees today use their retirement savings, such as IRAs or 401(k) plans, to pay for their retirement expenses.

“If they had an annuity to accompany their savings and investments, [retirees] could always count on a source of guaranteed monthly income, which would reduce the risk of running out of money. And annuities are a solution that can provide that protected income for life,” added Finke.

Additionally, a variety of studies have shown that retirees who receive guaranteed income in addition to Social Security are happier. Furthermore, a guaranteed lifetime income in retirement can provide a safety net during market downturns caused by unpredictable events like COVID-19.

The way retirement annuities pay out determines the amount of income they generate. Depending on the type of retirement annuity, immediate or deferred payouts are available.

An immediate annuity may be purchased as a lump-sum payment right before retirement by some buyers. As such, there is an upfront premium associated with immediate annuities.

As soon as you pay the premium, you’ll receive monthly payments. Depending on the annuity terms, the payout usually begins under a year.

In order to ensure steady payments throughout retirement, people close to retirement age should consider this option.

On the other hand, deferred annuities can be built over several years. It is common for people to pay their premiums over time, but they don’t begin receiving their payout until after retirement. Depending on the type of annuity you have, your money will grow either through interest or through stock and bond market gains.

Again, depending on your needs, there are a number of different payout periods you can choose from.

“Probably the most common is the life annuity with cash refund option,” explains State Farm agent Patrick Blevins. “With this option, if you’re still living once your initial investment has been paid out to you, you’ll keep receiving the same monthly payment for however long you live.”

“If you don’t outlive your initial investment, your beneficiary will receive a lump sum payment based on whatever portion of the initial amount wasn’t paid out to you, so it guarantees the return of principal,” he adds.

“Period certain options are popular too, where you or your beneficiary is guaranteed to receive payments for a specified number of years,” says Blevins. “If you live past that date, you’ll still continue to receive payments for the rest of your life.”

There are several ways in which retirement annuity income can be used. Generally speaking, it should be used in a way that meets your retirement needs and goals.

Some of the most common uses include:

In these circumstances, retirement annuity income offers the advantage of protecting your retirement savings for other expenses that inevitably arise.

There are two main reasons why people buy annuities: tax deferral and guaranteed income.

But, there are a couple of other benefits worth mentioning, such as:

Despite the advantages listed above, retirement annuities aren’t flawless. As such, you should also be aware of its disadvantages.

Annuities can be a valuable part of your retirement plan. However, a well-rounded retirement plan should also include IRAs, 401(k) plans, life insurance, and other traditional financial tools.

As a retirement income replacement, an annuity can also provide a source of income. Upon receiving the payout, you will continue to receive a steady, scheduled income for the rest of your life. In this way, retirement annuities protect you against outliving your retirement savings.

In short, annuities give you financial flexibility in retirement by diversifying your retirement portfolio.

To determine if an annuity is a good choice for retirement, it may be a good idea to speak with an advisor familiar with annuities. Ideally, you should avoid working with advisors who receive commissions when they sell annuities. And, as with any large purchase, always shop around.

It would also be helpful to create a written financial plan to determine if an annuity is right for you. A financial plan can then include an annuity that fulfills a specific retirement goal. You may not be a good candidate for an annuity if it does not fulfill a specific financial goal.

In simple terms, an annuity involves a contract between you and an annuity provider. In many cases, through an insurance company. If you give the insurer money, they will guarantee that the money will be returned plus interest (deferred annuity) or that you will start receiving income fairly soon (immediate annuity).

While interest accrues on annuities, they aren’t taxed until they are withdrawn, which means they accumulate interest. As a result, annuity earnings increase.

It’s important to make sure that your insurer will be able to honor its commitment to you in the long run. It is easy to find financial strength ratings from agencies such as A.M. Best, Moody’s, Standard & Poor’s, and Fitch.

The state insurance departments that regulate annuity insurers require them to file regular financial reports. Annuities are also protected from failure by state guaranty associations up to certain limits.

Besides doing your research on the annuity company you’re considering, you can spread your annuity money across more than one insurer so you’re fully protected by the guaranty association if you’re investing a lot of money.

There is one unique benefit to an annuity: the death benefit. Survivors of an annuity owner who die before all payments are disbursed can inherit the remaining assets. In the absence of a beneficiary, all remaining annuity assets are surrendered to the company that issued the annuity.

Besides annuities, there are other options for long-lasting income without the fees and complexity of them. Two options that may be helpful to you are Social Security and dividend stocks.

While it’s worth exploring retirement options that meet your needs, you shouldn’t put all of your eggs in one basket. In other words, to have a comfortable lifestyle in retirement, you should have a diversified portfolio.

Article by John Rampton, Due

John Rampton is an entrepreneur and connector. When he was 23 years old, while attending the University of Utah, he was hurt in a construction accident. His leg was snapped in half. He was told by 13 doctors he would never walk again. Over the next 12 months, he had several surgeries, stem cell injections and learned how to walk again.

During this time, he studied and mastered how to make money work for you, not against you. He has since taught thousands through books, courses and written over 5000 articles online about finance, entrepreneurship and productivity. He has been recognized as the Top Online Influencers in the World by Entrepreneur Magazine and Finance Expert by Time. He is the Founder and CEO of Due.

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