Buying Annuitized Income

Annuities may be used to partially or fully replace fixed income assets in a retiree’s investment portfolio; a guaranteed, smooth and known income is provided. Annuities for life will continue to pay out benefits as long as you live, mitigating the risk of running out of money if you live longer than expected.

 

Interesting Facts About Life Annuities

  • Current interest rates and mortality credits (based on your age) influence the amount of annuity income you can buy.
  • No other product pays higher income as you age, as long as you stay alive.
  • Mortality credits increase with age because annuity payouts are expected to be spread over fewer years (for example, 80-year olds get more monthly income than 55-year olds due to their more advanced age).
  • The importance of interest rates decreases with age as mortality credits increase:
    • Low interest rates have less influence determining the amount of benefit you can buy as age increases.

Types of Annuities

  • Life (payment continues until death) or term-certain (fixed payment for a fixed period of time).
  • Immediate or deferred start date.
  • By type of payments:
    • Fixed: fixed and guaranteed payment; no inflation adjustment unless purchased.
    • Variable: payments fluctuate with the performance of an underlying investment account; payments are not guaranteed but offer potential of growth to match or beat inflation over time.
    • Combination of fixed and variable.

Types of Fixed Income Annuities

  • Single premium immediate annuity (SPIA): start date is fixed and immediate
  • Fixed index annuity (FIA) with an income rider: start date is flexible
  • Deferred income annuity (DIA): start date is fixed (usually) at a future date
    • Death benefit or return of premium feature (in case you die before payments begin)

Planning Tips for Purchasing Life Annuities

  • Stagger annuity purchases over time, to gain additional income as you age, for the same amount of money and to hedge against fluctuating interest rates.
  • Buy a fixed annuity to cover basic expenses for as long as you live.
  • Buy a variable annuity to cover discretionary expenses and/or offset inflation.
  • Consider postponing purchases until ages 70–75, then ladder purchases of annuities over five years.

Added features/options negatively impact (reduce) the monthly benefit (such as, a guarantee period or death benefits).