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How to Build an Annuity Income for Retirement? Research Team | Posted On Monday, January 20,2020, 05:52 PM

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How to Build an Annuity Income for Retirement?



What is Annuity Income?

Annuity income is the income derived from annuity investments. People mainly invest in annuity plans to get a monthly income and thus such plans work best for retirees. Annuities do not offer life insurance cover rather they offer a guaranteed income either for life or for a stipulated period. These are tailor-made products to protect subscribers against the risk that they may outlive their resources. In these types of plans, the risk is borne by the insurance company who are required to pay a stipulated sum to the subscriber. You can also add other features that will not only help you get income but will also support your partner in case you die early. However, these additions come with a price.

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Types of Annuity:

Annuities can be divided into two categories. The classification is usually made depending on the time you buy them. They are:

Immediate annuities: an immediate annuity plan is the one that allows individuals to pay a lump sum and buy the plan. Most often people do not plan for retirement and they start taking retirement seriously by the time they are about to retire. Thus you can purchase immediate annuities if you are about to retire or if it’s too late for you to buy a deferred annuity plan. These plans will give you a regular and guaranteed income. You can also invest in them if you want to establish a second income.

Deferred annuity: a deferred annuity is a type of plan that requires the depositor to build a corpus over the years which will then be used to purchase an annuity plan at the time of retirement. Most insurers enable the depositors to deposit money at regular interval through a pension plan. When the pension plan matures, you can use the maturity proceeds to buy an annuity plan. You may opt to purchase an annuity plan during the accumulation period. However, in this case, you have to invest one-third of your corpus in annuities during retirement.

See Also: Best Pension Plans In India

How to Build an Annuity Income for Retirement?

Let’s start with the basics to understand how you can establish annuity income for retirement:

Annuity plans allow you to earn a regular income by investing a portion of your corpus. Since annuity plans can be set up at any age you can either start early by purchasing a deferred annuity or you can accumulate a good corpus through other instruments like PPF and purchase an annuity plan just before retirement. In both cases, you have to hand over a good corpus to the insurance company. In exchange, the insurer provides you with a steady income.

Annuity plans come with several benefits like income indexed to inflation or guaranteed period so that the subscriber has the advantage to recoup a value from their original investments in case they die prematurely.

However, age plays a vital role in annuity plans. The monthly income depends on the age when you buy the annuity and the how big the corpus or premium you pay. The income also varies depending on the prevailing interest rates. Over the past, years the annuity income has been a little low due to multiple rate cuts.

See Also: Types of Retirement Plans

To determine how much annuity is enough, starts by determining the number of additional sources of income you have other than your primary income. For example, rental income, income from a side business etc. Determine how much income you can constantly receive from them in future as well.

Next, evaluate your lifestyle expenses. You can measure it by the amount of money you spend for your necessities and your healthcare. Do not consider your loans or expenses of your child as these expenses would cease to exist when you retire. However, if you have a mortgage that may continue even after your retirement then you can include it as well. This may be time-consuming but you will have a rough idea of the amount you need to support your golden years.

Annuity plans are meant to cover your basic expenditure and thus make sure you also consider inflation while evaluating your retirement income. You can also plan other investments like FDs to be on the safer side in case of a market turndown.

See Also: Retirement Planning For A Secure Retirement

Now decide on the annuity plan you want to buy. If you want to create a corpus you can opt for a deferred annuity plan. Consequently, if you have a corpus you can also invest in immediate annuities if you are planning to retire early. You can also invest a portion of your retirement corpus to generate steady income post-retirement.

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