Guaranteed Income

Derek Notman |

Why an income annuity may be a good solution for entrepreneurs who sold their business and are looking for guaranteed income.

The journey of most entrepreneurs consists of starting with very little or no income from their venture, thus the ride at the beginning is scary & stressful with lots of ups and downs.  Over time the business grows and there is more stability with the entrepreneur’s income, but what happens when they sell their company?  The sale usually provides the founders a lump sum of cash but now their income is gone.

In working with entrepreneurs, I have found that some of them wish to establish a lower risk income source once they sell their company to cover their lifestyle expenses indefinitely.  They know how hard it was to start, scale, and sell their business and don’t want to put themselves and their families through the same financial stress and uncertainty again.  This is where an income annuity can be a robust “guaranteed income” solution*.

What is an Annuity?

Chances are you have heard the term annuity at one point or another.  But what are they, how do they work, and how do they help you?

Having more than 13 years’ experience as a financial advisor (Certified Financial Planner®) specializing in working with entrepreneurs I have had the privilege to help many of them through different life stages and understand the nuances of what solutions make sense at what time and for what reasons.

According to Investopedia, an annuity is: An annuity is a contract between you and an insurance company in which you make a lump sum payment or series of payments and in return obtain regular disbursements beginning either immediately or at some point in the future. The goal of annuities is to provide a steady stream of income during retirement. Funds accrue on a tax-deferred basis, and like 401(k) contributions, can only be withdrawn without penalty after age 59.5.

Types of Annuities

Although there are a lot of fixed annuities out there, like the following, I am going to focus on the Income Annuity for this post.

  • Income
  • Fixed
  • Indexed

What is an Income Annuity?

An income annuity allows you to convert some of your money into a stream of guaranteed lifetime income payments using a single lump-sum of money called a “premium,” or through flexible premium payments over time, depending on the type of product selected. In return, you receive a check from the insurance company on a monthly, quarterly, semi-annual, or annual basis—guaranteed—for the rest of your life, starting when you choose it to.

How can you benefit from an income annuity?

An income annuity can help protect against the risk of outliving your savings. No matter how long you live, you will always have the security of knowing that you have a regular monthly income. The amount you receive each month is guaranteed, and payments will continue for as long as you live.

What other advantages does an income annuity provide?

An income annuity is not subject to stock market performance. Regardless of the ups and downs of the financial markets, you can be confident that your annuity income is locked in and guaranteed. Additionally, with this product you set aside a part of your assets to help cover future living expenses. Monthly income checks, should you choose this payment option, make it easier for you to stay on budget, and helps to ensure your basic needs such as food, housing, and health care are covered.

What kind of funds can I use to purchase an income annuity?

To fund your annuity, you may want to use a portion of your checking or savings accounts, CDs, mutual funds, inheritances, or proceeds from the sale of your business. You may also be able to transfer certain retirement accounts, such as your IRA, 401(k), or lump-sum pension plan payout. In some cases, you can even combine multiple assets to fund an income annuity; however, tax-qualified and non tax-qualified funds may not be commingled.

What happens to my money if I pass away prematurely?

Payment options vary. Most income annuities offer some form of death benefit. One of the payment options you can select is a “Cash Refund.” If you die before your income payments equal the full amount of your annuity purchase price, your beneficiary will be paid the difference. Additional payout features are also available.

Poor Marketing for Annuities

There is a lot of bad or negative press about annuities.  Are there bad annuities out there?  Yes, of course.  Are there sales people out there selling them for the wrong reasons?  Yes.  But don’t let the negatives turn you away before really knowing the facts.

Income annuities are a valuable tool if used correctly, but the industry should do a better job of marketing them in a way that shows what they do for people instead of what they are.  People don’t care so much about what an income annuity is as they are about what it does for them.  This should be the focus.  In making annuities more attractive it would be a lot simpler if they were renamed as “guaranteed income” solutions as this drives home what they do for people.

It is important for entrepreneurs to receive solid financial advice, especially as they make the transition of exiting their business, that is administered through a qualified financial advisor who is experienced with such life events as selling a business.  Open dialog and determining the need should always be addressed first as it helps drive what solutions are best for the client.

Thank you for reading!



*Guarantees are backed by the claims-paying ability of the issuer.