Although a few workers still have an employer-provided pension that pays a monthly benefit unrelated to the stock market, most pensions are now uncommon. Today, many employees must decide how to manage their own retirement accounts and cope with retirement "what-ifs" — for example, what if investments lose money or underperform, if inflation erodes purchasing power, or if you live longer than expected?
Although it might seem like you'd be in good shape if you've accumulated $200,000 or more by age 65, remember that money could need to last 20 to 30 years after retirement.
There are a couple of options for reducing the risk of running out of money. One is to manage your assets yourself and take systematic withdrawals in amounts designed to last. Another is to use some of your savings to buy an immediate annuity that pays guaranteed lifetime income. Some people combine the two approaches — managing investments early in retirement and buying an annuity later.
Is an Annuity My Best Choice?
If your other income sources (pensions, Social Security, investment income) are sufficient to cover expenses, you may not need an annuity for income. If you still have a gap between reliable income and expenses, an annuity can provide monthly payments to help cover that difference.
An annuity can be particularly valuable if you reasonably expect a long lifespan, since payments continue for life. Family history of long-lived relatives can be one indicator. Conversely, an annuity may be less attractive if you have a serious illness or other reasons to expect a shorter-than-average lifespan.
How Can I Be Certain about the Future?
An immediate annuity guarantees payments for the rest of your life, regardless of how long you live. State insurance guarantee associations generally provide a backstop up to certain limits if an insurance company fails, though these limits vary by state.
If you worry about leaving money to heirs, many income annuities offer optional guarantees such as payments that continue to heirs for a set period (for example, five or ten years) after your death.
When Should I Buy?
Some advisors suggest delaying the purchase of an annuity until later in retirement (for example, ages 70 to 80) because the older you are, the higher the income payment for a given premium. If you delay, plan how you'll fund living expenses until you buy the annuity.
How Do I Find the Right Annuity Provider?
The goal is the best income at the lowest risk. Research company financial strength and credit ratings, and compare the income each insurer offers for a given deposit. You can learn more about annuities and their role in retirement planning at The Role of Annuities in Retirement Planning.
Compile a list of providers with solid ratings, then compare offers and contract features before deciding.
How Much Should I Buy?
Start by projecting annual retirement expenses, keeping in mind some costs fall (commuting, work-related expenses) while others may rise (travel, recreation, healthcare). Subtract Social Security and any pension benefits; an annuity should aim to cover the remaining difference.
For additional guidance on planning and estimating retirement needs, see Planning for Retirement: Tips and Insights.
* Annuity withdrawals are generally taxed as ordinary income and may be subject to surrender charges, in addition to a 10% federal income tax penalty if made prior to age 59 1/2. The guarantees and payments of income are contingent on the claims-paying ability of the issuing insurance carrier.
Frequently Asked Questions
What does an immediate annuity do?
An immediate annuity converts a lump sum into regular lifetime payments, providing predictable income.
When is it a good idea to buy an annuity?
It can be a good option if you need guaranteed income to cover living expenses and expect to live long enough to benefit from lifetime payments.
Will my heirs get money from my annuity?
Some annuities include death benefit or period-certain options that continue payments to heirs for a set time; plain life-only annuities typically stop at death.
What happens if the insurance company fails?
State guaranty associations provide limited protection for policyholders, but coverage limits and rules vary by state.