Guaranteed Income (Annuitization)

Annuities sometimes get a bad rap. The distaste people have for annuities may be based on a bad experience with a salesperson, the fear of “the insurance company getting all your money when you die”, or just plain misinformation.

Annuities can be a great choice for your retirement. That is, after annuitization an annuity provides a guaranteed income stream to you and or your spouse for the rest of your lives. Think of this as your own defined benefit pension. In fact, if you don’t have a defined benefit pension, you may consider the guaranteed income a private annuity provides. The guarantee comes from the insurance company providing the annuity. To date, no insurance company as ever defaulted on its annuity obligations.

So why can annuitization be a good thing for you? Let’s look at an example.

Let’s say you’ve determined when you retire that your annual expenses are $115,000. This sum includes your living expenses, taxes, and doing fun things in retirement (such as travel, dining out, and hobbies). You’ve determined that Social Security will provide $30,000 per year which leaves $85,000 to be covered with other retirement savings.

It’s safe to say that Social Security is providing $30,000 (inflation adjusted) per year in guaranteed income. In other words, you know that at the very least you’ll always have $30,000 per year for income, or $30,000 of expenses will always be covered. But maybe you’re uncomfortable with knowing only $30,000 is guaranteed. This is where the annuity can help.

Depending on the amount of money you have saved for retirement, you could purchase an annuity to provide a guaranteed income stream that meets 50, 75, or even 100 percent of your needed income – for the rest of your life! The amount you choose to annuitize will be dependent on several factors such as retirement savings, other income, RMDs, and estate goals (gifts and inheritances).

The flip side, however, is what can happen if you die before your life expectancy. It is true that in some circumstances the insurance company keeps your money (if you had a single life annuity) and this money goes back into the risk pool of other annuitants. But there are options to make sure that this doesn’t happen such as joint and survivor annuities, period certain annuities, and refund annuities. 

Annuitizing a portion of your retirement income shouldn’t be readily dismissed. Guaranteeing some of your income can reduce stress, meet certain retirement expenses, and ensure you never run out of money. Should you need help navigating your options, consider working with a fiduciary – preferably one who doesn’t sell annuities.