The Annuity Strategy That Can Help Boost Your Retirement Income

There are so many different options when considering the resources available to help you get over the hump of retirement. The task of leaving the workforce is essentially one of replacing income. Rather than working to earn a salary, your money will do this for you. Saving for retirement is an effort at amassing enough capital to generate a target payout figure that gives you the money you need in your later years without having to work. Some people choose to work later, or take on part time work in retirement as a means of adding to their financial reserves or as a kind of paid hobby, but that's a personal choice somewhat beyond the scope of retirement planning (which generally seeks to create the conditions to allow you to give up work entirely).

Saving with a tax-advantaged investment account like a 401(k) or Roth IRA is a great option. These allow you to make periodic deposits — up to federally mandated limits each year — and invest in a wide range of assets to grow your capital for retirement's funding demands later on in the future. Savers can also enjoy matched 401(k) contributions with the help of their employer in many instances, or even manage their own independent 401(k) if they work as a freelancer. Going an entirely different route, you might consider using an annuity strategy to guarantee retirement income later in life. Here's how annuities work, and a strategy you might consider with them.

An annuity is a financial coverage policy sold by a company. It's not an investment, per se, but will translate your monthly premiums into later payouts. An annuity requires contributions to the plan in much the same way that life insurance policies are structured. You'll pay into the policy, and when your draw period begins, you'll begin receiving income payments. It's a contract between you (the buyer) and insurance company (the seller), but unlike a life insurance contract, you'll be paid the benefit while you're still alive during the annuitization phase.

Annuities can be attractive financial tools for those who've saved for many years because they can sometimes be structured as a one-time, lump sum payment that begins delivering retirement income right away (or in a deferred structure). In this organization, you might essentially transfer a portion of your retirement assets from another vehicle into an annuity asset, buying the retirement product to guarantee a certain level of income. Indeed, fixed annuities offer a guaranteed payout figure that's prearranged before the contract is finalized and payments during the initial accumulation phase commence. Some people may want to steer clear of annuities, however, because the risk reduction they offer doesn't always come cheap when comparing the expense to other formats for retirement saving.

While annuities aren't for everyone, they make for a solid generator of retirement income that you can count on. They can be especially valuable when you utilize a combined approach and buy into a few different types of annuity contracts rather than placing all your eggs in one basket. Some annuity purchasers will explore building an "income floor" with fixed annuities like an SPIA (Single Premium Immediate Annuity). This is a tool that will start paying out immediately, and can be bought into with a portion of your retirement savings. The goal here is to develop coverage for your most pressing expenses. You might need a modest total of around $1,500 per month to cover essential expenses like groceries and utilities, and a fixed annuity can guarantee an income stream that combines with other consistent retirement income like your Social Security benefit to cover this baseline financial need for the rest of your life.

Another approach is the combination of fixed and variable products. Rather than seeking to secure the essentials, this gives you a guaranteed minimum with boosted payments made through the pairing of a variable annuity. These tools exhibit an income payment rate that crests and falls with the marketplace. This means that when the market is performing well — which it frequently does — payout figures will be higher. But lean months and years will come too, with lower earnings attached. Overall, volatility can often translate into boosted earnings during high times that cancel out underperforming periods. When matched up, these tools can provide a solid blend of stability and just the right volume of risk exposure to earn boosted returns.