In light of recent economic downturns, it may seem inevitable that employer-sponsored pension plans will decline. That makes it harder for many retirees to count on a steady stream of reliable income from an employer plan. Annuities can be one way to add predictable income in retirement.
What Are Annuities?
A fixed income annuity is a stable investment that provides a guaranteed, steady stream of retirement income for the rest of the annuity holder's life. If your employer isn't offering a pension plan, an annuity can help you build a reliable income stream.
There are several annuity options. For those nearing retirement, a deferred income annuity might be attractive: you make contributions during working years and begin receiving income upon retirement, or you can purchase one after retirement with a lump sum and defer payments to a later age.
An immediate annuity is another common choice for retirees. You pay a lump sum to an insurance company and begin receiving guaranteed payments right away. Payment amounts depend on the purchase amount, current interest rates, and the purchaser's age and gender; generally, older purchasers receive larger payments. Learn more about different payout options like immediate and deferred products by reading Income Annuities.
What Are the Advantages of Annuities?
- Emergency-related withdrawals without penalty
- Ability to control money if your circumstances change
- Most states protect annuity funds from creditors
- Probate-free death transfer
- Ability to convert funds to a guaranteed lifetime income
- Generally conservative, low-risk investing
- Tax-deferred growth until withdrawal
One of the most appealing features of a fixed annuity is that, like a pension plan, it offers retirees a steady, fixed, and guaranteed monthly income. The predictable monthly payment can help cover basic expenses that other, more volatile investments may not reliably meet.
Current life-expectancy estimates mean a sizable share of 65-year-olds will live into their 90s, which raises the risk of outliving retirement savings. Fixed annuity payments can help fill gaps left by other retirement sources such as Social Security.
Annuities also offer tax advantages: earnings grow tax-deferred, so interest remains invested and can compound until you make a withdrawal. Keep in mind that withdrawals may be taxed as ordinary income and that early withdrawals before age 59½ can incur penalties.
Insurance companies that issue annuities typically manage risk conservatively, which many purchasers view as a safer option during economic uncertainty. For context on how annuities fit into an overall retirement approach, see The Role of Annuities in Retirement Planning.
If your employer has reduced or eliminated pension offerings, you can read more about that trend at The Decline of Employer-Sponsored Pension Plans.
Our financial planners can help you evaluate whether an annuity makes sense as part of your retirement income strategy. If you want personalized quotes or to compare product options, you can talk to an agent.
Frequently Asked Questions
What is the difference between a deferred and an immediate annuity?
A deferred annuity delays income payments until a future date, while an immediate annuity begins payments soon after you pay the lump sum.
Are annuity earnings taxed?
Earnings in an annuity grow tax-deferred; taxes are due when you withdraw earnings, typically as ordinary income.
Can I access my money in an annuity if I have an emergency?
Many annuities allow withdrawals for emergencies, but surrender charges or tax penalties may apply depending on the contract and your age.
Will my annuity payments stop if the insurance company fails?
Guarantees depend on the issuing company's claims-paying ability and may be protected by state guaranty associations up to certain limits.