Retirement Planning

What Is A Retirement Annuity?

If you're looking for a way to turn your savings into retirement income, an annuity may be something to consider.

What is a Retirement Annuity?

Today, there are many factors that have the majority of Americans (59 percent) very worried about having enough money for retirement.1 Factors such as a slow-to-recover economy, disappearing pensions, possible Social Security cuts, and the very real possibility of outliving your money. The fact is, one of the most complicated financial feats most of us will ever tackle is making our money last through our retirement.

If you're worried that you won't have enough income for the lifestyle you want in retirement, you might want to discuss with a financial advisor or insurance professional about the potential benefits of using annuities as part of your overall retirement plan.

How do annuities work?

Designed to prevent the risk of outliving your income, annuities work by giving a lump sum or series of payments to an insurance company, and in return, the insurer agrees to pay you a guaranteed income for a certain length of time (or even for the rest of your life). Simply put, annuities can help turn your savings into retirement income so that you don't run out of money.

There are two types of annuities that investors can choose from when it comes to purchasing these instruments. Immediate annuities will begin paying a stream of income immediately upon issuance for either a set period of time or as long as the annuitant or annuitants are living. Immediate annuities are funded with a single lump-sum purchase. Deferred annuities will grow tax-deferred for a period of time before being paying out, and they can be funded with either a single lump-sum purchase or with a series of payments. Many employer retirement plans offer annuity contracts as investment alternatives for participants because of their insurance guarantees and flexible terms. Deferred annuities can be divided into separate categories:

  • Fixed annuities pay a guaranteed rate of interest for a set period of time and can offer a variety of interest rate guaranteed periods and payout options.
  • Fixed indexed annuities credit the contract with interest according to a formula that is based on the performance of an underlying financial benchmark, such as the Standard & Poor's 500 Index.
  • Variable annuities don't come with a principal guarantee like fixed and indexed annuities. The money that is invested in them is allocated among a selection of mutual fund-like subaccounts, which may rise or fall according to market conditions. Many variable annuity contracts offer living and death benefit riders that provide different guarantees within the contract. They typically come with additional costs.

Benefits of Annuities

The growth in your annuity is tax deferred, similar to the way earnings are handled with most retirement accounts. That means your money can compound year after year, and you won't be taxed on your money until you take withdrawals. And because any growth in your annuity value is generally not taxed until you take money out of the contract, the combination of tax deferral and the ability to establish guaranteed income can be an effective way to plan for retirement and other long term goals.

Whether you're currently retired, retiring soon, or retiring years from now, annuities can provide a variety of accumulation options. As you determine if an annuity may be right for you, remember that they are intended as vehicles for long-term retirement planning, which is why withdrawals reduce an annuity's remaining death benefit, contract value, cash surrender value and future earnings. Withdrawals and payments from annuities also may be subject to income tax and, if taken prior to age 59 ½, an additional 10 percent IRS tax penalty may apply. Because Protective Life and its representatives do not offer legal, tax, or investment  advice, it's important that you talk with your own legal, tax, or investment representative  about your specific situation.


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All Learning Center articles are general summaries that can be used when considering your financial future at various life stages. The information presented is for educational purposes and is meant to supplement other information specific to your situation. It is not intended as investment advice and does not necessarily represent the opinion of Protective Life or its subsidiaries.

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