Retirees worry that they will outlive their life time savings. Especially since life expectancies are always increasing.
An annuity can overcome this problem as an investment that is addressed to providing income for life.
An annuity will pay you a monthly income for a set amount of years or for your entire life depending on the contract terms. The contract is between you and a life insurance company. The contract is deemed annuitized when the insurance company begins paying you. A fixed annuity pays a fixed monthly payment based upon the current interest rates and the amount of money invested in the annuity.
Before annuitization the owner of the annuity can accumulate a lump sum by either a single payment or a series of premium payments. This increases the amount of the fixed monthly payment you will receive. The lump sum will grow tax deffered as an annuity is tax favored.
The trick here is to deposit as much money as possible into the annuity before retirement and then receive distributions after retirement. The reason is because after you retire your taxed income bracket will fall because of less income. So when you receive payments during annuitization you will not be paying much in taxes because of a low income due to retirement.
The owner does not have to start receiving payments once the annuity contract expires. The funds can be transferred tax free into a different annuity or a whole different investment entirely. It is best to buy an annuity at a younger age so you can accumulate wealth in the account during the mean time when you don’t really need it at that specific time. These strategies will ensure that you will never out live your savings.