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Building Retirement Income With Annuities

Jan 17, 2022 5 min read Kate Ashford

Key Takeaways

  • Annuities offer many options, specific to your needs.
  • Use annuities as an addition to your retirement portfolio.
  • Make sure to understand the fees involved with annuities.


You’ve probably put some thought into retirement — how old you’ll be when you quit your job for good, what you’ll do with your time, maybe where you’ll travel. But have you given any thought to where your retirement income will come from?



If you’re like many Americans, you ‘probably contribute to a retirement account, such as a 401(k) or IRA. But there are a variety of ways to create an income stream in your golden years. In many cases, a combination of products can help.

For instance, you might want to consider adding annuities to your retirement basket.

You fund your annuity with a sum of money—either up front or over a series of payments—and receive guaranteed retirement income now or in the future. Immediate annuities allow you to start receiving income anywhere between a month and one year. Deferred annuities allow you to start getting that income at a later date.

One benefit of annuities is that they can provide a retirement income stream that can last as long as you need it. It supplements can supplement other investments that may rise and fall throughout your retirement. Annuities also allow tax-deferred growth. That means you will not have to pay taxes on your gains until you withdraw the money.

However, annuities aren’t for everyone, and they aren’t risk-free. That said, with the right research, they may be a good addition to your portfolio.

Here are some important things you should know as you think about building retirement income.


There are different types of annuities

Fixed annuities provide a fixed return for a period of time. Variable annuities return income that could vary based on the performance of your investments. Indexed annuities tie returns to an index, such as the S&P 500®. A financial professional can explain the pros and cons of each type, and whether any specific annuity might be right for your unique situation.


Annuities should not be your only investment

Annuities provide an income stream in addition to your other retirement savings such as an IRA—not instead of them. Many financial professionals suggest you contribute to a 401(k) and IRA savings before putting money toward this vehicle.


You should do your research and understand the costs

There can be high fees associated with annuities, plus additional features (such as annuity income riders) that can enhance the final product. Make sure you understand what management fees and other costs you might pay on an ongoing basis. Also consider any surrender charges that may exist if you decide to quit an annuity early.

Annuity income is taxed at ordinary income rates, rather than favorable capital gains rates. This could also take a bite out of your returns. Also, withdrawals or distribution made prior to age 59½, may be subject to an additional 10% federal income tax penalty, sometimes referred to as an additional income tax.


Company strength is important

As with long-term care insurance, the structure of an annuity requires that the company you purchase from will be around for the long haul—and in sound financial shape. They must be able to make payments for many years since guarantees are based on the claims-paying ability of the issuer. You can check the financial strength ratings with a company such as A.M. Best or Moody’s.


There is risk involved

Annuities are considered a long-term investment designed for retirement income planning. Investing in an annuity means tying up a portion of your retirement savings in a fairly illiquid vehicle. Once you’re in, getting out can be expensive, or even impossible. There’s always the chance that you will die early—before you’ve gotten much return for your investment — or that inflation will rise faster than anticipated, making your annuity income less helpful. You also need to consider that investment returns and the principal value of the investment will fluctuate. This means that your investment, when redeemed, could be worth more or less than your original investment. Your financial professional can give you more information on the potential perils and options to help you plan appropriately.


What you can do next

Annuities can provide guaranteed lifetime income to supplement other retirement savings such as IRAs. They can also provide a degree of safety that stretches over several decades. However, annuities are not for everyone. Talk to a financial professional to help you determine whether they are a good option for your portfolio, and what kind of product is the best fit for you.


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