When an individual places money into an annuity with the intent of providing retirement income, they are in the accumulation phase of that annuity’s lifespan. This first phase of investment is designed to build up the cash value of the annuity so that when the annuitization phase is entered payments will be higher.
As is usually the case in any retirement-based investment, the longer the accumulation phase the more money is available later on. That will allow the investor to anticipate greater returns when cashing out the annuity. The ideal way to extend the accumulation phase is to start as early as possible. This way you have the additional benefits of compounding interest and more protection from normal business cycles.
Annuities are one of several tools available to investors when building their nest egg towards retirement. The generation currently reaching retirement age, the Baby Boomers, have created a greater demand for this type of investment. As a result there has been more interest into the workings of such instruments. Some annuities pay out for the rest of the retiree’s life, although that payment may not be enough to cover all expenses.
Part of the discussion has revolved around the privatization of Social Security. The current estimated replacement cost is about $250,000 per person. That would be the minimum a person would have to have set aside to replace the $14,000 a year provided by the Social Security benefit. These numbers are based upon an inflation-adjusted, insured cash flow that would pay for life.