Annuities as Income
If you are thinking about retirement, about to retire, or you’re retired and are concerned about your future finances, let me ask you a question. Suppose your rich uncle just passed away and in his will he gave you the option of receiving your inheritance as a lump sum or in the form of guaranteed lifetime income. Further, the lifetime income came with the ability to withdraw money from the account for economic emergencies and the ability to leave the undistributed inheritance to your beneficiaries should you pass away anytime soon. Which option would you take?
If you are like most people you would chose the lifetime income stream that can be tapped for emergencies and left to your family when you pass away. There’s no real downside.
Most of us will not have a rich uncle pass away and leave us an inheritance. But, like most people going into retirement, you will likely have the equivalent of a lump sum generated by years of saving and you will be concerned about your financial future. So your answer to the above question applies to your situation. Do you want to use the lump sum to provide for your financial security through your own investing or do you want to use it to create a guaranteed lifetime income stream with the benefits mentioned above?
One of the very few ways to provide a guaranteed lifetime income stream other than inheriting it is by purchasing an annuity. There are many types of annuities; immediate annuities that as the name implies begin payouts immediately, variable annuities that delay payouts while assets accumulate in mutual fund type investments, and fixed annuities where the payouts are also delayed. There are two types of fixed annuities, one where the accumulation interest rate is based on current interest rates available through CDs or government bonds, and a fixed index annuity where the interest rate is based on the gain of a stock market index such as the S&P500. In fixed index annuities if the index has a loss for the year no loss is applied to the accumulated principle and interest. The ability to participate in stock market gains but not suffer losses has contributed to the popularity of fixed index annuities. The principle and accumulated interest in all annuity types other than variable annuities is protected by a guarantee from the insurance company.
When considering annuities as an income stream the payout plans become important. The basic choices are listed below. There are many variations on the basic plans that can be chosen when the annuity is purchased.
- Income for Life
This plan provides and income stream for life meaning you as an individual will never outlive your retirement income. This is usually the plan with the highest payout since it is based on only the life of an individual person
- Joint Income for Life
With this plan your income stream is continued to your spouse upon your death and continues until the spouse passes away. The monthly payouts will be lower because the amount is calculated based on the life expectancy of two people.
- Income for Defined Period
With this plan the value of your annuity is paid out over a defined period of time of your choosing, such as 10, 15 or 20 years. Should you die during the first 2/3rd or so of the defined period the plan is guaranteed to pay your beneficiary for the remaining years.
- Defined Withdrawal
Under this plan, you can select the amount of payment that you wish to receive each month and how many you want to receive. Under this plan, obviously, the insurance company can not guarantee that income payments will continue for your lifetime since your account value will determine how many payments you will receive.
- Lump-Sum Payment
This option may be necessary to cover financial emergencies however there will be significant income tax payments due on all of the earned gains on your original investment.
Using annuities as income in retirement is an important consideration for most retirees. Annuities have evolved over the years to address and remove many of the faults present in the early annuities and to provide benefits that customers wanted but were not previously available. To discover more about the benefits of annuities we advise you to watch our video series to see how annuities have evolved to your benefit and how they can be used as income during your retirement.
Annuity product guarantees rely on the financial strength and claims-paying ability of the issuing insurer.