Income Annuities
There are types of annuities that are expressly designed to provide a guaranteed income stream in retirement – income annuities. And although income annuities share some similarities with their traditional counterparts, they differ in important ways.
Income annuities are designed for the sole purpose of providing a guaranteed stream of income, either immediately or in the future.
An immediate income annuity typically is purchased with a single premium or “purchase payment” and requires that income payments begin within 12 months of the date your contract is issued. Income can be guaranteed for as long as you live or for a specific period of time. Because immediate income annuities guarantee a specific income amount, they offer very limited access to withdrawals, and only for some annuity options. Even if you choose an annuity option that allows withdrawals, it’s important to remember that withdrawing money from your contract can have a significant impact on the dollar value of future annuity payments.
An immediate income annuity may be worth considering if you are nearing or already in retirement; want the security of guaranteed, predictable income; and need that income to start right away. If you think you might need that money down the road and you have limited additional liquid assets, an immediate income annuity is probably not the best choice for you.
A deferred income annuity, on the other hand, is designed to provide guaranteed future income. A deferred income annuity generally permits multiple “purchase payments” over a period of time. On the annuity date you choose, all purchase payments are combined into a single, guaranteed income stream that will continue for as long as you live; some deferred income annuities offer period certain options as well. In this sense, a deferred income annuity can be used to generate a “pension-like” stream of future guaranteed income.
A deferred income annuity differs from a traditional deferred annuity in important ways. In general, a deferred income annuity:
- Does not provide liquidity; there is no contract value or ability to make cash withdrawals, as there is with a traditional deferred annuity. The only time that distributions are made from a deferred income annuity contract is when annuity payments are made or a death benefit is paid.
- Because there is no contract value or liquidity, and your guaranteed income is paid to you over your lifetime, longer-duration, higher- yielding assets can be used to support that guaranteed income. That’s why a deferred income annuity can guarantee a higher future income amount than a traditional deferred annuity at the time you make your purchase payment(s).
So which annuity should you consider?
That depends on many factors.
For retirement purposes, an annuity can work in conjunction with the savings in your 401(k) plans or IRAs (both of which can be affected by market ups and downs). And given the way life spans are stretching, there’s also a chance you may outlive your savings.
An annuity can also work to supplement other sources of retirement income that are guaranteed, like a defined benefit pension plan or Social Security.
With any annuity, it’s important to get the facts before making your decision. Retirement is your reward for decades of hard work—and part of that work is making sure you’ll have enough money for the kind of retirement you want. If you are looking for an additional source of predictable income now or in the future or a product that is designed to help you accumulate assets on a tax-deferred basis, annuities may be an option worth exploring.