These days, there are very few guarantees in life, and that’s especially true when it comes to planning for retirement. In fact, nearly 70% of Baby Boomers aren’t confident their savings will last.1 With pensions becoming less common and many savings options tied to volatile financial markets, guaranteed income can be difficult to come by. One way to ensure lifelong retirement income is with an income annuity.

An income annuity is an insurance product that can provide guaranteed income beginning on a set payment date and continuing for the rest of your life. Income annuities provide guaranteed fixed or variable payments. In this article, we’ll focus on fixed income annuities.

How do fixed income annuities work?

An income annuity works by allowing you to turn an amount of money into a series of income distributions that continue as long as you live. In exchange for your initial payment (the “premium,”) an insurance company agrees to pay you a set amount on a set schedule, usually monthly, for life.

The amount you’ll receive each month is set when you purchase the fixed annuity. It’s based on a number of factors, including your age, your gender, the purchase amount, and interest rates at the time of purchase.

Different types of fixed income annuities

For the most part, income annuities fall into two different categories, defined by when they begin paying out:

  • Immediate annuities begin distributing payments immediately after purchase, usually starting the following month. You might select this type of annuity if you are already retired or plan to retire very soon.
  • Deferred annuities allow you to select a specific date in the future, usually at least two years after the purchase date, to begin receiving payments. In exchange for deferring your payments, these types of annuities tend to provide higher income payments. You might consider this option if you have a few years or more before you plan to retire.

What benefits do fixed income annuities provide?

One of the primary benefits of a fixed income annuity is that it provides a predictable source of income that you can’t outlive, sort of like social security. Because it isn’t tied to market performance, the monthly amount you’ll receive will never go down. Many annuity owners use their annuity income to help bridge the gap between social security and savings or investment income to maintain their standard of living.

Additionally, annuities can make it easier to manage your savings, plan for unpredictable expenses, and maintain your financial independence in retirement.

What benefits do fixed income annuities provide?

As with any financial decision, there are some factors you should consider before buying an annuity. Perhaps the most important of these is that the money used to purchase a fixed income annuity will be permanently locked into a contract, and your access to funds will be limited to the monthly income payments you will receive for life. There may also be tax considerations, so you might want to consult a tax professional.

Lastly, it’s important to remember that the guarantees of an annuity are only as good as the company making them. Make sure to investigate the financial strength and trustworthiness of the insurance company you’re considering before making a purchase.

Learn more about annuities in the New York Life Learning Center, or call 1-800-313-6841 to have your questions answered by a knowledgeable representative.