When we retire, most of us will lose what has become a comforting fact of life: a steady paycheck deposited directly into our bank accounts, whether every week, every two weeks, or every month. However, we will still need to pay most of the same bills we've always paid, not to mention going shopping for food, clothing, and entertainment. How can we replace that paycheck?
If we are fortunate, we may have a pension through our employer, via a defined benefit retirement plan. In these kinds of plans, throughout the course of our working life, we contribute a certain percentage of our earnings on a regular basis into our company's general pension fund, and when we retire, we are guaranteed a monthly payment for life, with the amount of that payment calculated based on various factors such as our age at retirement, our pre-retirement salary, and other factors.
However, employers these days are more likely to offer a defined contribution retirement plan, the most popular of which is the 401(k) plan. Employees can elect to
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When you purchase an immediate annuity, you hand a sum of money over to an insurance company, bank, or other financial institution, and you immediately begin getting monthly checks, which you will continue to receive until you die. Commonly, payments can continue for the life of you and your spouse, ending when the surviving spouse passes away.
The advantages are obvious: you will have a guaranteed stream of income for the rest of your life (or for a specific number of years, if you choose to set it up that way). The interest rate that you are earning on your annuity might not beat current market rates, and you might not earn what you would in the equities markets, but then again security has its price. You won't lose anything, as you might in the stock market, and you won't need to worry about falling interest rates eroding your monthly