Income in Retirement from Annuities

Written by: Scott Sery

As you plan for your retirement, you will want to make sure you have an income that will sustain your desired lifestyle.  In order to do that, you will use various income streams.  One that is often overlooked, but can be a great benefit to people is the annuity.  These complex savings vehicles can be a great benefit to any retirement plan when they are used correctly.

The primary function of an annuity is to provide income.  While technically an annuity is an insurance product (protects you from running out of money), it is really a savings vehicle.  Just like any other savings they can be qualified or non-qualified; regardless of the type, all annuities are tax-deferred.  An annuity can be fixed or variable.  A fixed annuity is one that will be backed by the good faith of the insurance company that issues it.  They will offer a set rate of return, and regardless of what the market does, the investor will see that return in his or her portfolio.  A variable annuity, on the other hand, is invested in the stock market.  Most companies will offer a wide range of investment choices, and the growth in the account is based on the performance of those investments.  These investments are not guaranteed and can lose value.

Annuities have two different phases.  During the accumulation phase a person is contributing to the account.  They build up the value of the account and they will see growth as promised by the insurance company (in the case of a fixed annuity) or as provided by the underlying investments (in the case of a variable annuity).  Throughout a person’s lifetime they can accumulate money in an annuity.  When a person decides they want to take an income stream from the annuity (they must be age 59 and a half) they convert it and begin the distribution phase.  The insurance company will look at the person’s age, the current interest rate environment, and several other factors.  They will then determine that based upon the value of the contract they will promise to pay a certain amount, each month, for the rest of the insured’s life, or for a certain period of time.  There are many different options when it comes to the payout, or distribution, phase.  For those who would rather accumulate the money elsewhere, they can drop a lump sum into an annuity and have it immediately start paying out.

The biggest advantage to an annuity is that they provide income for life.  The individual can know that they will receive a certain amount, and they will never be without an income.  During their working years, they can put money into the annuity, and all the growth will be tax deferred.  Taxes are paid upon distribution.  During the accumulation phase and the distribution phase, the annuities have many options.  There is a product that will meet just about anyone’s needs.

The downside to annuities is that they often come with higher fees than other investment vehicles.  There are a lot more management expenses, as well as mortality expenses that need to be calculated in.  These fees are deducted from a variable annuity.  For a fixed annuity, the company will offer a lower rate of return than can be found elsewhere.  Aside from these, if a person spends their whole life accumulating money, then they annuitize the contract, they could die shortly thereafter.  For many payouts, the income stops when the person dies.  Therefore a lifetime of earning could end up going to the insurance company and not to the heirs.

Annuities have their place.  They can help to provide a great source of income during retirement.  When used correctly the retiree can have a guaranteed income, and use other savings to help supplement their retirement.  While it is not recommended that all a person’s savings be put into an annuity, the annuity does have a place in most plans.


Income in Retirement from Annuities

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