Fixed and Income Annuities Overview
Jan 18, 2023
Blueprint Income Team
An annuity is a way to turn your savings into guaranteed income you can’t outlive, no matter what happens in the market or how long you live.
Traditional annuities, like income annuities and fixed rate annuities, provide guarantees.
Early in your working years, it's common to think about preparing for retirement in terms of assets and accumulation. How much do I need to save? And what kind of return can I make? But, as you get closer and closer to retirement, you realize that what's important are not assets themselves, but their ability to be converted into income. If you have enough saved, perhaps you can just live off of your portfolio's interest and dividends. But, you may be drawing down your portfolio to pay for your expenses as well. If that's the case, you risk outliving your savings.
There is another option, and it's called an annuity. It's a way to turn your savings into guaranteed income you can't outlive, no matter what happens in the market or how long you live. When you buy an annuity, you pay an insurance company to take over your market risk and longevity risk. Think about annuities as a way to supplement your Social Security, which likely will cover less than 50% of your spending needs.
Annuities Overview: Traditional Annuities
The traditional types of annuities are fixed annuities and income annuities. Fixed annuities are like CDs. They help you grow your assets at a guaranteed return for a short period of time.
An income annuity, in contrast, provides a guaranteed, steady source of income that continues for life. When you deposit money into an income annuity, whether in the form of one lump sum or gradually over time, you permanently convert assets into income. Why? Because you can run out of assets, but you cannot run out of annuity income. In this way, income annuities are the opposite of life insurance. Life insurance protects your family if you pass away prematurely. Income annuities protect you if you end up living longer than you expect.
There are three types of income annuities: immediate annuities, longevity annuities, and Qualified Longevity Annuity Contracts (a type of longevity annuity). They differ in (1) when income starts, and (2) where the money to fund the annuity comes from. With immediate annuities, income starts, well, immediately. These annuities are purchased by people about to retire or already in retirement. With longevity annuities, income starts 2-40 years from now, thus purchased by people years away from retirement. For both of these, you can use pre-tax IRA money or post-tax savings to fund them. But, the QLAC is a special type of longevity annuity that only accepts IRA money and has income starting after age 72 and up to age 85. They are typically purchased by people looking to defer their RMDs.
To sum up, traditional annuities (income annuities and fixed rate annuities) are fully-guaranteed products.
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Blueprint Income Team
We are a team of finance, insurance, and actuarial professionals working to make it easier for everyone to achieve a steady and comfortable retirement. We write about annuities (the good and the bad) and provide strategies to help Americans prepare for retirement.