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As you plan for your retirement, you are likely to come across the mention of something called an annuity, and with good reason: An annuity is an excellent way of guaranteeing a stable income in your retirement years.

Suppose that by the time you retired at 65, you had enough money saved to live comfortably for 15 years. This number isn't too unreasonable; life expectancy in the US for those born in 2001 was 77.2 years, having risen steadily from a mere 49 years for those born in 1901. But just because the nation-wide average person will live for 12 years after retirement doesn't mean this will be true in your case. What will you do when you're still going strong at 78, but your savings account is on its last legs?

You won't be too far off the mark if you think of an annuity as a life insurance policy in reverse. Where life insurance is meant to protect your loved ones from financial hardships in the event of your death, an annuity is meant to guard you against outliving your retirement savings.

The idea is simple: You use your savings to purchase an annuity from your life insurance company. In return, the company pays you an agreed-upon monthly amount, and continues to do so until your death. You get peace of mind, higher interest returns on your savings, and lower taxes, since only the amount you recieve each month is taxed, rather than the entirety of your savings at once. But what happens if you die before your savings would have run out? That is entirely up to you.

The beauty of the annuity is its flexibility – enough variants to suit your needs, whatever they are today or may be in the future. If you have no one to leave the money to, you can purchase a Straight Life annuity, where the remainder of the principal is not refunded if you die before your savings are spent.

The advantage of the straight life annuity is higher interest rates than many of the other options.

If, on the other hand, you have children (or a favourite charity) to whom you wish to leave the remainder of your savings, you can purchase a Period Certain & Continuous annuity. This variant will also pay out for the rest of your life, but if you die within a predetermined period (say, 10 years), the insurance company will keep paying the annuity to your beneficiaries up to the end of that period.

Suppose you wanted to cover both yourself and your spouse. The variant to consider would be a Joint & Survivor annuity. Should one of you die, the other will continue to be paid an annuity, though usually a somewhat diminished amount. But again, the choice is up to you, and yes, there is an option to have the full annuity amount be paid out to the survivor.

Finally, you should keep in mind that it's never too late. There is no deadline by which you have to have purchased an annuity, nor will buying one make your other savings less important. You can buy an annuity with an extended savings plan or with a single lump sum. You can vary the payment amounts. You can even decide if you will use before-tax or after-tax income to pay for the annuity. It's never too late to investigate your options and see if an annuity is the right financial approach for your retirement. Our expert insurance brokers will be happy to assist you in selecting the best combination of annuity types to meet your needs.

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