These days, someone retiring at 65 can expect to live at least another 20 years. In fact, many retirees can expect to live to age 90 or older. Unfortunately, few people have traditional pensions that pay an income every year. Buying a retirement annuity plan is like buying a pension for yourself. However, you might be wondering, "Are retirement annuities a good idea?"
Fortunately, a local independent insurance agent can help you compare your retirement annuity options. They can provide you with quotes for the best retirement annuities from several providers in your area. But first, here's a closer look at retirement annuities and why you might want to choose one.
Key Takeaways - Retirement Annuities
- Retirement annuities are an investment option that can provide guaranteed income for life after retirement by providing periodic payments on a set timeline.
- Retirement annuities can provide fixed, indexed, or variable payments depending on the type you choose.
- Retirement annuities work well for some people, but they're not the right choice for everyone, so it's important to review your options.
- Working with an independent insurance agent is strongly recommended, since they can help you compare retirement annuities and other investment options to make an informed choice about what works best for you.
What Is a Retirement Annuity?
Retirement annuities are financial tools that provide someone with an income after they retire. The annuity company creates a contract and agrees to pay you a set amount of money periodically. You can choose the timeline that works best for you.
Retirement annuities are also known as income or immediate annuities. That's because the insurance company begins to pay an income immediately after receiving a purchase payment or a premium. Immediate annuities have several options for paying out income.
Types of retirement annuities
- Life-only: With this type of retirement annuity, a payment is guaranteed for the lifetime of the annuitant. No payments are made after the annuitant's death. Life-only options will pay out a higher monthly or annual income than the other options. Joint and survivor life only is available for the longer of two lives, usually spouses.
- Life and period certain: With this type of retirement annuity, the annuitant's lifetime payment is guaranteed. The payments are made for at least a "certain" number of years, regardless of when the annuitant dies. The certain year options are usually 10 and 20. Joint and survivor options are available for life and period certain.
- Fixed period: Fixed annuities for retirement planning work with payments that are made for a specified number of years, regardless of when the annuitant dies.
Insurance companies calculate the payout for life-only and life and period certain using an annuity rate. Fixed-period payouts are based strictly on interest rates.
Can Annuities Provide Lifetime Income?
Yes, annuities can provide lifetime income in a series of periodic payments. Retirement annuities are designed to provide you with income for life after you stop working. You can work with the company that issues the annuity to set the terms and timeline that work best to receive your income payments.
How Do Retirement Annuities Work?
Retirement annuity rates for each income option are calculated based on the annuitant's age and gender, based on an interest rate the insurance company chooses. The interest rate changes with market conditions, so the rates change frequently. The longer the insurance company predicts that you will live, the lower the payout will be.
Annuity Inflation Riders
Some retirement annuities have optional inflation riders. There are two types of inflation riders, consumer price index (CPI) and cost-of-living adjustment (C.O.L.A.). Both riders increase the annuity payment each year, but they are calculated differently.
CPI riders are based on the consumer price index, much like Social Security benefits. CPI inflation riders, however, are not widely available, if at all. C.O.L.A. riders increase the annuity payment by a fixed percentage. The options are usually 2%, 3%, or 4%. The initial payout with an inflation rider is lower than the initial payout without one.
Variable Retirement Annuities
Variable annuities in retirement are based on how the market performs, so the income in some years could be higher than in others. Insurance companies use the assumed rate of interest to calculate the initial variable income payments from an annuity. The initial payment is calculated based on your age, sex, the assumed rate of interest, and the accumulated value of your variable annuity.
If the investments that you selected perform better than the assumed interest rate, your payment will be higher. If the performance of the investments that you selected is lower than the assumed interest rate, your payments will be lower.
Should I Buy an Annuity for Retirement?
The answer to this question depends on your personal needs and goals for your retirement savings and how you'd like to access them. Immediate annuities are different from other investments because you are exchanging principal for income. Once the income begins, you generally have no access to the money.
On the other hand, the income is higher than you would receive on other "low-risk" investments. An independent insurance agent can help you determine if a retirement annuity is the right choice.
What Are the Pros and Cons of Retirement Annuities?
There are a few pros and cons of retirement annuities to consider before determining whether this investment option is right for you.
Pros of retirement annuities
Buying a retirement annuity is a simple way to create guaranteed lifetime income for yourself. Retirement annuities can also help you plan a lifetime income for two people. Joint and survivor life expectancy can be much longer than for each individual.
Retirement annuities produce a higher income than you would get for a similar low-risk investment. A portion of the income is excluded from taxes because it is considered principal.
Finally, as people age, managing day-to-day finances becomes more difficult. Retirement annuities offer a predictable long-term alternative that doesn't require hands-on attention. So, if you've been asking, "Are annuities good for retirement savings?" the answer can certainly be yes in certain cases.
Cons of retirement annuities
When you purchase a retirement annuity, you give up access to the principal. In turn, you give up the opportunity for other investments in the future. Here's why that can be a problem. Interest and inflation rates change. Since retirement annuities are long-term arrangements, changes in the economic environment can make them more or less effective over time. While retirement annuities do produce a higher rate of income, it takes a long time to recover your principal.
Retirement Annuities vs. Pensions
Retirement annuities and pensions are two different types of investment options that each provide guaranteed income in retirement. However, pensions are usually funded by your employer, while annuities are purchased by you and are a form of insurance. Pensions offer regular payments for life. You may receive your payments in the form of an annuity or a lump sum. Annuities typically offer periodic payouts.
What to Look for in a Retirement Annuity
The first concern for any type of annuity is the insurance company's financial condition. The primary rating services that cover insurance companies are AM Best, Moody’s, S&P Global (formerly known as Standard & Poor's), and Fitch. Each has differences in its methodologies and rating designations.
The rating each service assigns reflects its opinion about the insurance company's ability to pay claims. The chart below summarizes the financial strength ratings of the different services.
| Rating Agency | Highest Ability To Meet Obligations | Medium Ability To Meet Obligations | Lowest Ability To Meet Obligations |
|---|---|---|---|
| AM Best | A++ to A- | B++ to B- | C++ to C- |
| Moody’s | Aaa to Aa | A to Baa | Ba to Caa |
| S&P | AAA to A | BBB to B | CCC to C |
| Fitch | AAA to AA- | A+ to BBB- | BB+ to CC |
An independent insurance agent can help you shop around, since there can be a big difference in what each insurance company is capable of offering with a retirement annuity. If you are in less-than-perfect health, some insurance companies sell medically underwritten income annuities with higher payouts. Your agent can help you weigh your options and walk away with a retirement annuity from a top-rated carrier.
An Independent Insurance Agent Can Help You Find Retirement Annuities
Retirement annuities can be an important part of your lifetime savings plan. While they have many features and benefits, they are not for everyone.
Fortunately, an independent insurance agent can help you review your options for safe annuities for retirement income and help you determine if this is the right investment option for you. They'll help you shop and compare many different retirement annuities for seniors to find the best policy and answer any questions you have in the process.
