Kiplinger’s recent article entitled “Annuities: 10 Things You Must Know” explains that, as traditional sources of guaranteed retirement income (like pensions) are no more, many retirees are wondering where to look. An annuity may be an option. However, not all annuities are alike, and some may not be appropriate for everyone’s situation.
Immediate Annuities vs. Deferred Annuities. There are two types of annuities: immediate annuities and deferred annuities. Immediate annuities are best for retirees who want to receive payouts immediately. If you invest money in an immediate annuity, an insurance company guarantees that you will receive a fixed payment every month for as long as you live (or as long as you or a beneficiary are alive). However, usually your money is locked up after you give it to the insurance company. Some insurance companies, however, permit a one-time withdrawal for emergencies. In light of this, you may not want to tie up all of your savings in an annuity.
Deferred annuities are better for people who are still saving for a future retirement because that money they invest grows tax-deferred, until it is withdrawn later. A deferred annuity, also known as a longevity annuity, needs a smaller cash outlay. You get guaranteed payments when you reach a certain age, and you'll receive the highest payout with an annuity that stops paying when you die.
Annuity Payouts: Single Life vs. Joint Life. If you buy an immediate annuity, you’ll get the highest annual payout if you buy a single-life version. The payouts cease when you die, even if your spouse is still alive. However, if your spouse needs that income, you may want to take a lower payout that will also continue for his or her lifetime.
Fees for Cashing Out Your Annuity. Although deferred annuities let you cash out at any time, you may not see all your money returned. A surrender charge is usually imposed that’s about 7% to 10% of the account balance in the first year. It gradually decreases every year, until it disappears after seven to 10 years. If you withdraw money before age 59½, you generally have to pay an early-withdrawal penalty of 10%.
Deferred Annuities: Fixed vs. Variable. Most deferred annuities allow you to invest your money in mutual-fund-like subaccounts. These products are known as deferred variable annuities. They let you add (for a fee), guarantees that you won’t lose money, even if the underlying investments decline in value. If the market drops, you can still withdraw about 5% of the guaranteed balance each year. You can also withdraw the actual account value at any time (after the surrender period expires) if your investments increase in value.
Reference: Kiplinger (May 21, 2021) “Annuities: 10 Things You Must Know”