Annuities and Retirement Planning

David Upchurch |

The growing demand for more predictability and security planning for retirement income has led an increasing number of retirees and pre-retirees to look to annuities as way to provide more stability in their investment portfolios. They are also looking to annuities as a way to replace the third leg of the retirement income stool as a guaranteed lifetime income. Retirement planning occurs in different phases and at different stages of peoples’ lives. Depending on what stage of life a person is in, there are different kinds of annuities that can be evaluated for various situations.

Addressing Portfolio Stability with Fixed Indexed Annuities

Offering minimum guaranteed rates along with the potential for higher earnings based on the performance of the stock market indexes, FIAs have become increasingly popular in a low interest rate environment. With the prospect of rising interest rates, which can increase portfolio volatility, advisors are turning to fixed indexed annuities (FIA) for a portion of their bond portfolio. FIAs can offer preservation from bond and stock market declines while retaining the fixed income nature of bonds. Although the upside is limited on FIAs, investors enjoy the minimum rate guarantee and the benefit of locking in and preserving their gains.

A Guaranteed Lifetime Income with Single Premium Immediate Annuities

Single Premium Immediate Annuities (SPIA) have frequently been the vehicle of choice for investors who desire predictability and security. They are one of the only types of investment vehicles that can manage longevity risk and guarantee a lifetime income stream, much like a guaranteed pension. An SPIA provides a baseline for an income portfolio, a guaranteed income that is independent of both market and interest rate volatility. When included as a part of an overall investment portfolio, an SPIA provides the foundation of an income strategy upon which a range of investments can be layered to create capital growth and increasing income.

Some advisors suggest that it is better to wait until interest rates increase and/or investors wait until they’re older because they could lock in a higher lifetime monthly payment. Other advisors are employing a laddering strategy, purchasing SPIAs at different stages of retirement to potentially capture higher interest rates and a higher payout rate based on the investor’s increasing age.

Future Income with Deferred Income Annuities

Deferred income annuities (DIAs) are a more recent innovation capturing the attention of advisors and investors who want to address future income. DIAs can be especially effective for investors who have no need for an immediate income stream, but they anticipate a bigger need for income in the future. It is sometimes referred to as longevity insurance because it can be set up to turn on an income stream at a much later age. It is purchased with a lump-sum payment at an earlier age.

Using current interest rates and actuarial assumptions, the amount of future payout can be substantially higher because the insurance company assumes a shorter period for monthly payments. The advantage of a DIA over an SPIA is that the same amount of monthly payout can be purchased with less capital because of the time that passes between the purchase and the payout. If an investor dies before receiving any of the payout, a cash-refund, if purchased as an option, is paid to the DIA beneficiary.

Annuities are certainly not a cure-all for the challenges facing retirees today and they are definitely not a one-size-fits-all strategy. However, when considered in the context of a well-conceived retirement plan, their unique properties can help retirees pursue financial security like no other financial instrument.


Fixed and Variable annuities are suitable for long-term investing, such as retirement investing.  Gains from tax-deferred investments are taxable as ordinary income upon withdrawal. Guarantees are based on the claims paying ability of the issuing company. Withdrawals made prior to age 59 ½ are subject to a 10% IRS penalty tax and surrender charges may apply.  Variable annuities are subject to market risk and may lose value.

Riders are additional guarantee options that are available to an annuity or life insurance contract holder.  While some riders are part of an existing contract, many others may carry additional fees, charges and restrictions, and the policy holder should review their contract carefully before purchasing.  Guarantees are based on the claims paying ability of the issuing insurance company.



*This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation by us of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets. This material was developed and produced by Advisor Websites to provide information on a topic that may be of interest. Copyright 2024 Advisor Websites.