What Is a Lifetime Annuity and How Does It Work?

When planning for retirement, one of the biggest fears people face is outliving their money. What is a lifetime annuity? Simply put, it's a financial contract that guarantees you'll receive income payments for the rest of your life, regardless of how long you live. By popular demand, we will be continuing our conversations from last week on annuity strategies! This time, we are joined by special guest Joseph DeFazio! Joe is a seasoned financial educator and will bring a fresh perspective on lifetime annuity income and how annuities can benefit your financial life! https://www.youtube.com/watch?v=YtZbQx8qVXc If you're interested in guaranteed lifetime income, then this video is for you! We'll discuss the different types of annuities and explain the basics of lifetime annuity income. Annuities as a Form of Risk TransferHow to Structure Your AnnuityImmediate vs. Deferred StartPayment Structure OptionsSingle-Life vs. Joint-Life CoverageAdditional Guarantee OptionsReal-World Example: Single Retiree vs. CoupleWhat is a SPIA? (Single Premium Immediate Annuity)The Appeal of SimplicityWho Should Consider a SPIA?Who Should Consider Annuities?When Annuities Don't Make SenseLifetime Annuity IncomeReal-World Example: Kathy's AnnuityLifetime Income Annuity Pros and ConsThe UpsideThe DownsideLifetime Annuity Income — How Payments WorkHow a Lifetime Annuity Fits into Your Retirement PlanBook A Strategy Call Annuities as a Form of Risk Transfer [11:10] “An annuity is a private contract that completely transfers the risk of outliving your money to the insurance company in exchange for a premium payment. The insurance company uses bonds and [then] layers on actuarial calculations, actuarial science, that pools the risk so they can guarantee an income stream for as long as your contract specifies.” When you buy a lifetime annuity, you're basically handing over your biggest retirement worries to the insurance company. They take on the risk, and in return, they promise to pay you for life. In other words, an annuity is the inverse of whole life insurance, which transfers the risk of not living long enough to the insurance company (in exchange for a premium). Because insurance companies manage the risk of living too long AND not long enough, they’ve created balance. So what risks are you actually transferring when you purchase a lifetime annuity? There are three big ones that keep retirees up at night: Outliving retirement savings - What if you live to 95 and your 401(k) runs dry at 85? With a lifetime annuity, that's the insurance company's problem, not yours. Market volatility impacting income - Market crashes don't care if you're 75 and need your monthly income to pay for groceries. Your annuity payments stay the same regardless. Inflation erosion - This one's trickier with fixed annuities since your payments won't increase, but some annuity options do include inflation adjustments.  How to Structure Your Annuity There are two phases to an annuity: the accumulation phase and the annuitization phase. During the accumulation phase, you’re funding the annuity, and you can choose either a fixed rate or variable rate, both of which have their pros and cons. When you're looking at a life income annuity, you'll find there are several ways to set it up depending on your situation. Here are the main choices you'll face. Immediate vs. Deferred Start In the annuitization phase, one of the choices you must make is whether you want your benefit now or later. If you choose to start receiving your benefit within 13 months, that’s called an immediate annuity. Any time after that is considered a deferred annuity. Think of this as the "when" decision. Need income right away because you're already retired? An immediate annuity starts paying you within a year. Still working and want to let your money grow? A deferred annuity lets you wait and potentially get larger payments down the road.