Lottery frenzies build whenever the Mega Millions jackpot crosses the quarter billion-dollar mark, invoking visions of big houses, fancy cars, and other luxuries. I bet almost no one thinks much about the parallels between lottery winnings and annuities.
If you wonder how lotteries and annuities are linked, consider that jackpot winners face a choice in how to collect. They can choose an annuity option, in which their take-home pay is higher but paid out over time, or they can select a smaller, lump-sum payout. Notably, winners tend to choose the lump sum, even though it is a smaller prize. (If you are lucky enough to win, consult with legal and financial experts on which path to choose.)
While very few people will win a lottery, millions of Americans will retire with their own “jackpot” accumulated from years of saving in retirement accounts. The size of a retirement account is not comparable to the lottery, of course, but in both cases, the goal is to not run out of money.
Unfortunately, some winners of millions in lottery cash who chose the lump sum option have ended up financially worse off than in their pre-jackpot days. The annuity option could have provided some insurance against over-spending since a winner would have received a large, annual check for 30 years.
Those folks probably thought their money would never run out. Likewise, without careful planning, many retirees may see their hard-earned savings dwindle faster than hoped. Retirement savings need to last to help pay expenses for the next 15, 20, 30 years, or even longer. Today, one member of a 65-year-old couple has a 50% chance of living to at least age 95.
Therefore, workers and retirees need to carefully plan for retirement, preferably under the guidance of a knowledgeable financial professional. The plan should consider various investment options, including annuities, to ensure sustainable monthly income. Annuities can help bridge the gap between investing in riskier assets like stocks and the fear of running out of money during retirement.
An annuity is a contract purchased from an insurance company. There are several types, but basically, a consumer pays a lump sum that the insurer uses to provide the consumer with protected lifetime income. Using part of retirement savings to generate lifetime income through an annuity offers stability by delivering a monthly check, which the insurance company guarantees to pay for the remainder of the purchaser’s life, or the lives of the purchaser and a spouse or partner. No other financial product can do that.
