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What Is a Lifetime Payout Annuity?


Lifetime payout annuities can be instrumental in navigating the financial journey to secure a steady income stream during retirement. Essentially, a lifetime payout annuity is an insurance product that an investor purchases from an insurance company that pays out a portion of the portfolio for the life of the investor. The annuity is scheduled to begin payouts at a selected age or date with the payout amount hinging on an array of factors such as the sum invested, the annuitant’s age and gender, as well as indexed or fluctuating rates. A financial advisor can be helpful in determining the suitability of this type of investment based on individual financial goals.

Benefits of Lifetime Payout Annuity

For those creating a retirement plan offering a regular income, a lifetime payout annuity might seem appealing. However, it’s important to fully analyze before moving forward. The benefits of a lifetime payout annuity could span from safeguarding the principal and guaranteed income for life to the potential for higher returns due to compounding interest. Here are some of the most important benefits to consider

  • Stable retirement income: A lifetime payout annuity can provide stability in your retirement income. It’s a great way to know exactly how much you’ll be receiving each month, no matter what. 
  • Cost of living can be added: With this type of annuity, you may be able to receive a cost of living adjustment over time. This is especially important if you’re going to be receiving payments for multiple decades. 
  • Reduces longevity risk: One of the risks of retirement is running out of money before you die. A lifetime payout annuity reduces that risk by providing you with a set payment for the rest of your life. 
  • Flexible payment structures: A lifetime payout annuity can be structured to provide you with a fixed income or variable income that depends on the value of the investments in the portfolio. This helps meet your individual needs. 

All these features present it as a potentially secure choice for individuals aiming for financial stability in their retirement years. 

Drawbacks and Risks of a Lifetime Payout Annuity

A financial advisor explaining to a client whether they should buy a lifetime payout annuity

Lifetime payout annuities, like most investments, carry their own set of potential pitfalls and risks. It’s important to understand what you’re getting into before you begin. Here are some things to keep in mind: 

  • Inflation: Some predicaments associated with a lifetime payout annuity encompass inflation risk where fixed payouts may not keep pace with escalating living costs.
  • Liquidity: You may find yourself having a lack of liquidity as the money invested must stay put for a considerable duration and can’t be accessed. 
  • Penalties: You might have to pay possible penalties for an early withdrawal if you do try to access the funds
  • Insurer: This doesn’t happen often but there is a risk of the insurer of your annuity becoming insolvent. 
  • Annuitant death: Payments from lifetime payout annuities normally end with the annuitant’s death so there often is nothing left for heirs or beneficiaries.

It’s important to analyze the pros and cons of a lifetime payout annuity before moving forward because they are not a one-size-fits-all investment. 

Considerations Before Choosing a Lifetime Payout Annuity

There are a lot of factors to consider before deciding if an annuity is right for you and even more when deciding which type of annuity is right. You’ll want to think about multiple parameters such as age, health condition, income needs, investment aspirations and your own risk appetite. 

All of these things impact whether a lifetime payout annuity fits your overall financial profile. For example, younger investors might find a deferred annuity more advantageous, while those with a longer life expectancy might be better off with a lifetime payout annuity. However, anyone in either group might find that an annuity in general isn’t a good fit for them because of their lack of liquid investments. 

So, the first step is to decide if an annuity is a good fit for your finances and your long-term goals. Once that is decided, you can then start analyzing which type of annuity might work for your situation. 

Bottom Line

A man trying to decide if he should buy a lifetime payout annuity

A lifetime payout annuity could be a suitable investment for those eyeing a guaranteed income during retirement. However, considering that every investment comes with inherent risks and prerequisites, understanding one’s personal financial situation becomes the most important piece of the puzzle. Therefore, consulting with an experienced professional before taking a plunge into investing in a lifetime payout annuity is strongly recommended. It allows the investor to align investment choices with personalized financial targets.

Tips for Retirement

  • Sometimes what seems like the perfect investment actually doesn’t line up with your long-term goals. When investing for retirement you may want to make sure you have the help of a financial advisor, who can help you make a plan and help manage your portfolio. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now
  • You can use SmartAsset’s free retirement calculator to see if you’re saving enough money to last you through your golden years. 

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