What is an Income Annuity?

Derek Notman |

Practical ways to use a lifetime income annuity for retirement income.

In order to simplify your finances during your retirement years, it may be prudent to consider purchasing an income annuity with part of your retirement funds to guarantee a base of income for life.

As an experienced financial advisor and Certified Financial Planner® having helped a number of clients assess and implement an income annuity, I will outline the basics of income annuities and help you narrow down if purchasing one makes sense for your situation.


Why purchase an Income Annuity?

Previous generations had a lot more access to pensions.  We don’t, but we still have the same desires to guarantee part of our retirement income.  So, how do we guarantee income if we no longer have a pension?

This is where income annuities play a crucial part.  By converting part of your IRA, 401k, 403b, etc. money into an income annuity you are transferring your longevity and market risks to an insurance company in exchange for a guaranteed pay check for as long as you live.

Simply put, an income annuity will provide guaranteed income for your retirement years.  The income annuity ensures that you receive a ‘pension-like’ guaranteed income stream for life.  In essence, it’s extra income that you can count on similar to Social Security income and any personal or government pensions you may have from a previous job.


You define your retirement income

An income annuity allows you to customize your income stream and ultimately, the more guaranteed income you have in retirement, the more opportunities become available for you to live the lifestyle you want.  


An Income annuity provides a stream of income, no matter what

What are some of the benefits of a lifetime income annuity?

  • Fixed income payments that are not subject to market fluctuations
  • The ability to adjust your income to meet current economic conditions*
  • Additional features to access a portion of your money if and when you require it*
  • Income covering the lives of one or two people
  • Potential legacy options for your beneficiaries

* Via certain features or riders available on specific contracts by some carriers. May be subject to fees and limitations.


How Lifetime Income annuities work

An income annuity provides you with guaranteed income and you can purchase an annuity before or after you retire.  Depending on the type of policy you choose to purchase, the funds in your annuity -- which are invested as a lump sum or in a series of payments generates a stream of income paid out to you – for life.

  • Age
  • Gender
  • Premium amount
  • Interest rates in effect at the time of purchasing the annuity
  • Chosen pay-out option.


Ten practical ways to use an income annuity

  1. A guaranteed annual vacation: Guaranteed income that can help ensure a great vacation every year
  2. Unplanned occasions: Whether it’s a graduation or a wedding, you can plan comfortably without breaking the bank or a sweat
  3. Bridge to Social Security: Taking Social Security too early is not always the wisest strategy.  Annuity income can allow for deferral of Social Security for the benefit of higher Social Security income later.
  4. Spoil the grandkids: When it comes to spoiling your grandkids, you have a little more flexibility
  5. Hobbies: Whether you’re into sailing, dancing or playing golf, you can now fulfill your hobbies and pursue all the fun activities you dreamed of.
  6. Health expense support: Monthly prescriptions, treatments and other health care costs can be paid with your annuity income.
  7. Be charitable: During retirement, charitable interests don’t need to dwindle, and you can plan for what’s important to you.
  8. Home alterations: Knowing you have additional income can ease the burden of home repairs and alterations.
  9. Help with tax expenses: As we all know, taxes are inevitable and are a fact of life.  By having a predictable income this can be used to pay your tax bill.
  10. Dining out: Whether it’s an exotic dinner or a lunch at your favorite restaurant, your annuity income can assist you in indulging your passion for food.


Should you buy an income annuity?

Short answer, maybe. 

It all depends on your specific financial situation and needs.  What I have seen a lot of people do is figure out what their projected retirement expenses are going to be then subtract any already established guaranteed income sources like Social Security or a pension and then see what the gap is.  Filling in this gap with an income annuity is a great way to help ensure your basic needs are met indefinitely in retirement.

In addition to this some people will even put more into an income annuity to guarantee a “play check”.  This play check is money for fun!  Although not necessary, some people have really enjoyed the extra cash each money to use on themselves for fun or to give to their grandkids, etc.

The best way to determine if you should purchase an income annuity is to determine your cash flow needs, project it out into the future, and then see how to best fill in any income gaps.  Doing this in conjunction with the rest of your financial and investment planning tends to be the best way to structure an income annuity.

Enjoy your money!

Thank you for reading.


Derek Notman