How Can an Annuity Provide Retirement Income?

An annuity can turn part of your retirement assets into monthly or annual income. Payments can start soon or years later, and may last for a fixed period, one lifetime or two lifetimes. A guarantee applies only to what the contract specifically promises, not automatically to all withdrawals, account values, rates or investment results.

1. Why Plan for Retirement Income?

No one knows exactly how long retirement funds must last. Consider essential expenses, Social Security, pensions, taxes, health care, inflation, emergency savings, long-term care and a spouse's income after a death. An annuity may help fill part of the gap between reliable income and essential expenses.

2. Immediate and Deferred Income

An immediate annuity usually begins payments shortly after purchase. A deferred income annuity starts on an agreed future date. A deferred annuity with an income rider accumulates first, then provides withdrawals according to the rider.

3. Annuitization Is Different From an Income Rider

Annuitization generally converts contract value into payments permanently; you may no longer be able to withdraw the entire balance. An income rider may allow lifetime withdrawals while retaining some account value, but charges, withdrawal percentages and rules apply.

4. Common Payout Options

Options include life only, joint and survivor, life with a period certain, fixed period, cash refund and installment refund. Life only may start with a higher payment but stop at death; adding spouse or refund protection generally lowers the initial payment.

5. What Determines Income?

Factors include premium, age when income begins, number of people covered, rates, deferral period, payout choice, rider terms, withdrawal percentage and insurer pricing. Deferring income often raises annual payments but requires a longer wait.

6. The Income Base Is Not Cash Value

An income base calculates rider income and may grow through a roll-up or step-up. It is generally not the account, cash or surrender value and cannot be withdrawn in one lump sum.

7. Can Payments Continue After Account Value Reaches Zero?

Some riders may continue guaranteed withdrawals if the owner follows contract rules. Excess withdrawals, starting early or other violations can permanently reduce or terminate benefits.

8. Inflation and Liquidity

Fixed payments lose purchasing power as prices rise. Consider increasing-income options, retaining some assets for growth, or committing only part of retirement assets to guaranteed income. Keep liquid reserves for health care, repairs, family needs and long-term care.

9. Qualified and Nonqualified Funds and RMDs

An annuity in an IRA follows retirement-account tax rules and adds no extra tax deferral. A nonqualified annuity uses after-tax funds; earnings generally grow tax deferred and taxable earnings are typically ordinary income when distributed. Ask how required minimum distributions (RMDs) coordinate with the rider.

10. When Might It Fit?

An annuity may help when Social Security and pensions do not cover essential costs and someone is willing to exchange some liquidity for contractual income protection. It may be less suitable if substantial short-term cash is needed, emergency savings are inadequate, surrender restrictions are unacceptable or coverage duplicates existing income.

Record account value, income base, initial income, survivor percentage, fees, excess-withdrawal consequences and insurer strength before purchasing.

This is general education, not legal, tax, investment or individual insurance advice. Guarantees depend on the issuing insurer's claims-paying ability. Contract terms govern income, costs and withdrawals.