AARP Hearing Center
Jean Chatzky explains what an annuity is and how having one could benefit your retirement savings plan. For more financial retirement tips, check out Chatzky’s new book, “The Forever Paycheck,” in collaboration with AARP Books. Visit: aarp.org/foreverpaycheck
Key takeaways
- An annuity can provide monthly income that may last for life.
- Different annuity options offer varying levels of risk, return and protection.
- Fees, restrictions and added features can affect overall investment results.
Summary
Annuities are a retirement planning tool designed to provide a steady stream of income. Jean Chatzky explains that an annuity is a contract with an insurance company in which you contribute money and later receive regular monthly payments. For some people, that income can continue for the rest of their lives, helping address concerns about outliving retirement savings.
The discussion also covers the advantages and trade-offs of annuities. While they can offer predictability and peace of mind during uncertain market conditions, they may involve fees, limited access to money and added costs for optional features. Chatzky emphasizes the importance of researching options and consulting a financial professional before making a decision.
The key takeaways and summary were created with the assistance of generative AI. An AARP editor reviewed and refined the content for accuracy and clarity.
Full transcript
[0:00:00] Madeline Radman: Do you know what an annuity is?
[0:00:02] Dave Schneier: I do not know what an annuity is.
[0:00:04] Beth Carter: I feel like I should know what an annuity is, but, but I don’t.
[0:00:09] Bethany McMahon: I’ve heard it, and I feel like people that have planned for the future know what it is, but I can’t tell you what it is.
[0:00:16] Jean Chatzky: OK.
[0:00:16] This is not at all unusual or surprising.
[0:00:21] A lot of people heading into retirement have a similar worry.
[0:00:25] How long will my retirement savings last?
[0:00:28] You don’t know how long your retirement will be.
[0:00:31] That makes it really hard to know how much you can spend.
[0:00:35] Wouldn’t it be nice if you just kept getting a paycheck every month forever?
[0:00:41] It’s possible, and one of the most effective ways to do it is something called an annuity.
[0:00:48] An annuity is a financial contract between you and an insurance company.
[0:00:53] You pay them a sum of money — a lump sum now or premiums over time —
[0:00:59] and at an agreed date, they start sending you a monthly payment.
[0:01:04] Depending on the type of annuity, those payments could last for the rest of your life.
[0:01:09] Annuities have been around for a long time, but they aren’t as widely known as other retirement plans such as company pensions, IRAs, 401(k)s.
[0:01:21] Over the years, annuities have had a bad reputation because they can sometimes come with high fees, they can be difficult to understand, and they can sometimes be
[0:01:31] hard to get out of if you need your cash.
[0:01:34] These days, though, they’re getting renewed attention.
[0:01:38] Amid rising costs and volatile markets, a growing number of older Americans fear outliving their savings.
[0:01:45] Annuities can give you some peace of mind.
[0:01:48] Annuities come in many shapes and sizes.
[0:01:51] They can be fixed, meaning you’ll get a fixed rate of return protected from market shifts, or they can be variable, meaning you can take some risk in
[0:02:02] return for a potentially higher return.
[0:02:05] They can also have all sorts of add-on features like benefits for your
[0:02:10] survivors if you die before drawing down your entire amount, or annual
[0:02:15] increases to protect against inflation.
[0:02:18] Just be aware that these additions can make the annuity more
[0:02:22] expensive and eat into your return.
[0:02:25] For those seeking flexibility and the biggest returns on their investments,
[0:02:30] an annuity may not be for you.
[0:02:32] Purchasing an annuity is a big investment, and as with all investments,
[0:02:37] you need to do your homework.
[0:02:38] If you’ve never talked to a professional, this is a really, really good time to
[0:02:43] dial one up and have a conversation.
[0:02:46] There are more strategies to maximize retirement planning in
[0:02:50] my new book, The Forever Paycheck.
[0:02:52] Check it out at aarp.org/foreverpaycheck
