The last thing anybody wants to do during their golden years is worry about money. But once you stop working, how do you support yourself? That’s why retirement planning from an early age is crucial. If you have an effective pension plan in place, it will ensure that you receive a steady stream of income during retirement. An annuity plan is one such pension plan to consider.
An annuity pension plan provides a fixed income – monthly, quarterly, half-yearly, or yearly – either for a predetermined period or for the rest of your life. The amount of the annuities depends on factors such as the age you purchase the plan at, your life expectancy, the amount of capital you invest, and interest rates.
How does an annuity plan work?
To buy an annuity plan, you need to enter into a contract with a life insurance company. The insurer agrees to make fixed payments to you depending on the payment frequency you select in exchange for a lump sum amount of money or premiums for a certain period before your annuity payments begin. To determine the amount of retirement corpus you will need, you can use an online retirement calculator. It’s essential to get this amount right because you don’t want to run out of money in your retirement years.
The right age to buy an annuity plan
When deciding at what age to buy a retirement plan, it’s essential to understand the two main types of annuity plans – deferred annuity and immediate annuity.
In a deferred annuity plan, you can first accumulate a corpus by making a lump sum or regular premium payments for a certain period. This amount earns interest and helps build your corpus further. The annuity payments from the insurer’s end start at a later or deferred date. As opposed to this, in the case of an immediate annuity plan, once you pay a lump sum amount to the insurer, your annuity payments start right away.
The best age to buy an annuity plan is now. It’s never too early to start planning for your retirement. Most insurance companies allow you to buy an annuity plan at the minimum age of 30. If you are around that age and have a few more decades to go before your retirement, you may want to opt for the deferred annuity plan since you don’t need to start receiving annuities just yet. This also allows you enough time to accumulate your savings and earn returns on it to build a bigger retirement corpus. However, if you already have a corpus saved through other instruments and are closer to retirement, you may want to opt for an immediate annuity plan.
Here are some things to keep in mind when buying an annuity plan that’s best suited for you:
- There are several types of annuity plans that are offered by insurance companies. These include deferred annuity, immediate annuity, life annuity, annuity with return of purchase, etc. Go over each of their benefits and terms and consider which best aligns with your financial needs.
- Depending on your risk appetite you should choose between fixed annuities and variable annuities. When the annuity amount is fixed and known, it is called fixed annuity. Conversely, when the annuity depends upon the performance of the underlying investments, it’s called a variable annuity.
- When using an online retirement calculator, remember to anticipate your monthly expenses considering inflation and how your expenses and priorities will change post-retirement.
- You can also consider a joint annuity plan for you and your spouse. In joint annuity plans, once one of the partners passes away, the other one continues to receive the annuities for the rest of their life.
- You should invest in other instruments such as term insurance and health insurance along with an annuity plan. All these different products are specifically designed to look after you and your family’s financial well-being in different ways.
An annuity plan can work as a strategic pension plan to guarantee a regular stream of income. But it’s important to remember that an annuity plan should not be your only source of retirement income. Depending on your life expectancy, monthly expenses, retirement goals, inflation rate, and more, you should chalk out a comprehensive retirement plan that has multiple streams of income.