Annuities — Do You Really Know What They Are?

It's the worry everyone has at least once before retiring: 'If I live a long life, will my savings run out first?' These days, 20 or 30 years of retirement is normal. Retire at 65 and your savings may need to carry you to 90 or 95 — a stretch nearly as long as your working years.

That's not something to fear; it's something to plan. The first step is the whole picture: when to start Social Security, your savings, and your future medical costs — how much arrives each month, and where the gap is. One way to fill that gap is an annuity.

Put simply, an annuity turns a lump sum into monthly income — that is its job. An annuity is a contract with an insurance company: you entrust part of your savings, and the insurer pays income back the way the contract promises. Depending on the contract, that can be for a set period or for life.

Think of it as the paycheck you give yourself in retirement, the way a salary arrived every month while you worked — a personally built lifetime income, much like Korea's national pension pays for life. When and how the income starts differs by contract, so the details deserve careful review.

Annuities credit interest in two main ways. A simple analogy helps.

A fixed annuity is like a certificate of deposit in one way — the rate is set in advance — but it is not a bank deposit and is not FDIC-insured. How long the guaranteed rate applies varies by contract.

An indexed annuity aims to credit more interest when the index rises, while crediting no less than 0% in a down year — though fees, rider charges, and surrender charges can still reduce your contract value. Interest is partly linked to a stock index's movement, but your money is never invested directly in stocks.

Monthly retirement income is easiest to understand as layers.

Layer 1 — Social Security. For most families, it's the base of retirement income. But when you start taking it changes your monthly amount for life, so timing belongs inside the whole picture.

Layer 2 — is that enough? Often, Social Security alone doesn't cover living costs. Say you need $4,000 a month and Social Security brings $2,500 — that leaves a $1,500 gap every month. Fill it by drawing down savings, and the worry above — outliving your money — starts to become real.

Layer 3 — an annuity. It can add one more stream of monthly income into that gap. It can be designed so a set amount arrives each month even when markets swing, making a second layer under your living costs alongside Social Security.

Moving money from a 401(k) or IRA into an annuity is called a rollover. The question usually comes up when retiring and deciding what to do with a workplace 401(k), when old accounts are scattered across past employers, or when it's time to turn a lump sum into monthly income.

It deserves care. Done properly, a rollover can generally move money without triggering current taxes; done wrong, it can create taxes and penalties — and it's hard to undo. Review it with a licensed professional. Timing matters too: your age (withdrawals before 59½ carry a penalty), your retirement date, and when you start Social Security all change what makes sense. Before any decision, I'll also point you to a tax professional.

You don't have to move everything — or anything. When leaving it alone is better, that's exactly what I'll tell you. Understanding your options costs nothing.

Many people change jobs or retire and leave a 401(k) behind. Left-behind accounts are easy to forget, hard to manage, and limited in options. There are four main choices.

If you do decide to move it, the method matters. A direct rollover (the safer method) moves money straight from one retirement account to another of the same tax type — done properly, it generally does not trigger current taxes. Taking the money yourself first calls for caution: typically 20% is withheld for taxes up front, and if the full amount isn't redeposited within 60 days, taxes and penalties follow. It's where the most mistakes happen. We walk the steps through together, one by one.

One of retirement's biggest expenses is medical care, and medical costs swing widely with your Medicare choices. However well you plan retirement income, leaving medical costs out makes it half a picture.

If retirement is close, looking at both together matters even more, because the big decisions crowd into the few years around 65 — when to retire, when to start Social Security, Medicare enrollment, and what to do with the 401(k). These decisions interlock: how you build retirement income changes your income, and your income can change your Medicare premiums (IRMAA). Decide each one separately and things slip through.

Because Medicare is my primary specialty, I look at retirement income and health coverage as one picture, not two — down to checking, one by one, whether your doctors are in network and your medications are covered.