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Building Retirement Income With Annuities

Jun 27, 2019 5 min read Kate Ashford

Key Takeaways

  • Find your flavor. Annuities offer many options, specific to your needs.
  • Part of a larger whole. Use annuities as a strong addition to your retirement portfolio.
  • Avoid sticker shock. Make sure to understand the fees involved.


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 even where you’ll travel. But have you given any thought to where your retirement income will be coming from? 



If you’re like many Americans, you’re probably contributing 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, and a combination of products can help.

For instance, you might want to consider if adding annuities to your retirement basket may be right for you.

You fund your annuity with a sum of money—either up front or over a series of payments—and receive a steady 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 an income stream that can last as long as you need it to—an option to other investments that may rise and fall throughout your retirement. Annuities also allow tax-deferred growth, which means you will not have to pay taxes on your gains until you withdraw the money.

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

Here are some important things you should know.


Annuities come in a variety of flavors 

Fixed annuities provide a fixed return for a period of time, while 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 — 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, plus any surrender charges that may exist if you decide to quit an annuity early. One other thing to note is that annuity income is taxed at ordinary income rates, rather than favorable capital gains rates, and 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 — because 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 purposes. 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.  And 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 worth less.  You also need to consider that investment returns and the principal value of the investment will fluctuate so 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 manage your exposure.


What you can do next

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


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