The prospect of retirement may excite you, as you envision spending time with friends and family, pursuing hobbies and traveling. However, you will need income during retirement to maintain your standard of living, pay healthcare expenses and pursue your dreams. Guaranteed lifetime income annuities may be a helpful financial tool to realize the retirement you always imagined. Alongside other retirement accounts, annuities can help provide critical income during your retirement and up until your death, ensuring you don't outlive your savings. Learn more about lifetime income annuities and how they may play a role in your retirement strategy.
Guaranteed lifetime income is a dependable income stream during your retirement that will continue until your death. It ensures payments will be made to you regardless of your lifespan or market conditions. Guaranteed lifetime income can alleviate concerns about outliving retirement savings. Some common sources of guaranteed retirement income include:
Unlike Social Security and pensions, individuals have some level of control over annuities. Companies can freeze pension plans, halting benefits accrual and changes to Social Security can be made by the federal government at any time. Once an annuity contract is signed and agreed upon contributions are made, the annuity is not subject to change, making it a dependable source of income.
A lifetime annuity is a contract with an insurance company that, once agreed upon contributions are made, guarantees a stream of income until the annuitant's death. These payments are made regardless of market fluctuations. This can help alleviate concerns of outliving your retirement savings or losing your retirement savings due to poor market conditions.
Not all annuities are lifetime income annuities. Term annuities agree to pay a stream of income for a specified period of time, but not necessarily until the contract holder's death. It is possible to purchase both fixed and variable annuities that offer lifetime income streams. This is commonly purchased through what's called a rider, or an additional contract provision that provides additional coverage for specified terms.
Both immediate annuities and deferred lifetime annuities can be structured to deliver a stream of income for life. Immediate annuities simply involve a lump sum contribution and payouts begin shortly after that contribution is made, typically within 12 months. Deferred annuities involve contributions over time and payouts are made at some time in the future to allow for growth.
The annuity process begins with the accumulation phase, where contributions are made to the annuity, allowing its value to grow tax deferred. During this investment period, contributed funds are invested in various portfolios by the insurance company and earn interest.
Next comes the annuitization phase, where accumulated funds are transformed into a reliable stream of income payments, either for the defined period of time or up until the annuitant's death, depending on the contract. During this payout phase, the annuity holder receives regular scheduled payments for a steady stream of income.
Consider some of the benefits of lifetime income annuities when determining if they might be a good fit for your retirement strategy.
There are a variety of annuities available to meet your specific retirement needs, your income level and your tolerance for risk. Read on to explore some of the different types of lifetime income annuities.
Depending on your age and how close you are to retirement, you may choose an immediate or deferred lifetime income annuity. If you are close to retirement age and would like to start receiving annuity payments within the next year, for example, an immediate annuity may be right for you. You may, for example, choose to take some of your savings from a 401(k) or other retirement account, and invest in an immediate annuity to begin receiving payout in the next year.
If you're younger and retirement is several years or decades away, a deferred annuity would allow you to make contributions over time, giving that money the opportunity to grow over time. If you choose a variable deferred annuity with a lifetime guaranteed rider, you will be able to choose where your funds are invested from a given number of investment options.
Fixed annuities guarantee a specific rate of interest on your annuity contribution, allowing you to depend on a specific payout amount each and every month for the duration of the contract term or up until your death. Fixed annuities offer the stability of predictable payments. At the same time, your fixed annuity payout may not cover your expenses as planned if inflation rises.
Variable annuities offer greater growth potential than fixed annuities. Variable annuities offer the opportunity for you to choose where your contributions are invested among a given number of options provided by the insurance company. This means that contributions grow tax deferred, depending on the performance of the underlying investments, offering the potential for a greater return (or loss) than is possible with fixed annuities. A lifetime income variable annuity may be a good choice if you'd like some level of control over how the contributions are invested. Variable annuities may also provide some growth that could help cover inflation. However, if you're risk averse, a variable annuity may not be the best choice for you, as there is no limit to the potential gains and losses unless additional riders are purchased.
Much like a variable annuity, an indexed lifetime income annuity offers the potential for greater growth than a fixed annuity. An indexed annuity links your interest earnings to a market index such as the S&P 500. However, indexed annuities cap growth potential but also offer principal protection, making them less risky than variable annuities. An indexed lifetime income annuity offers some growth potential with a limit on potential losses, combining features of both fixed and indexed annuities.
Through the purchase of riders and/or multiple annuity products, it's possible to benefit from a combination of annuity types to achieve a guaranteed lifetime income. This means a portion of your contributions may be allocated to a fixed annuity and another portion to a variable annuity. The purchase of riders can also offer protection of your principal or inflation protection. The hybrid option may allow you to achieve just the right balance between guaranteed lifetime income and growth potential, but it requires a good understanding of annuities and can also be associated with high fees. Consult with a financial professional to determine what combination of annuities and/or riders may work best for you.
Riders are add-ons that allow you to customize an annuity. Riders can help ensure the annuity you invest in meets your specific needs and retirement goals.
There's a lot to think about before purchasing an annuity. It's important to take into consideration your own retirement needs as well as the specifics of the annuity. Here are some things to consider when purchasing an annuity.
Here are some steps that may help guide you through the process of choosing an annuity that meets your retirement goals.
The first step is to determine your expected expenses in retirement. Compare those with your other sources of income during retirement and identify gaps between expected expenses and income. Ask yourself these questions:
There are so many different types of annuities to choose from, all of which can be customized with additional riders. Sorting through the specific provisions of each can be challenging. It may be helpful to outline the pros and cons of each type of annuity and make a checklist of provisions they fulfill. For example, if you know you want to access a guaranteed stream of income, but you are worried that the payments from a fixed annuity would be eroded by inflation, you may want to consider investing in an indexed annuity with a GMIB rider. This would provide a guaranteed stream of income but have the potential for your principal to grow with the market.
It's always a good idea to seek assistance from a qualified financial professional. Navigating all the options available with annuities can be complicated. A qualified financial professional can help you align your personal retirement strategy with the annuity product/s that best meet your needs.
Annuities are not always top of mind when individuals are planning for retirement, but they are well worth consideration as a part of a comprehensive retirement strategy. Lifetime income annuities may be able to provide a guaranteed stream of income until you die, ensuring you don't outlive your retirement savings. Explore Protective's Learning Center to learn more about the different types of annuities.
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