- Good annuities are those that provide a guarantee
- There are three types of income annuities: immediate annuities, longevity annuities, and qualified longevity annuity contracts (a specific kind of longevity annuity)
- The Personal Pension is a new take on the income annuity that accepts contributions as low as $100 per month, allowing you to build it over time
- Be leery of the bad types of annuities which focus more on the market upside and liquidity than the guarantee
As mentioned in our annuities overview, there are good annuities and market-based annuities. Good annuities, a.k.a. income annuities, are simple products, and don’t promise any market upside. They very simply convert your assets into guaranteed retirement income you can’t outlive. They provide valuable longevity protection (sort of the opposite of what life insurance provides) that no other product can.
There are three different types of income annuities. All three of these good annuities provide guaranteed income for life, no matter what happens in the market or how long you live. They differ in (1) when the income starts, and (2) where the money used to fund the annuity comes from.
The first type of income annuity is called an immediate annuity, otherwise known as a single premium immediate annuity or SPIA, for short. When you buy an immediate annuity, you convert a portion of your pre-tax or post-tax savings into a monthly paycheck that starts within one year. Immediate annuities are purchased by people about to retire or already in retirement who don’t want to worry about market volatility or outliving their savings.
The second type of income annuity is called a longevity annuity, otherwise known as a deferred income annuity or DIA. When you buy a longevity annuity, you convert a portion of your pre-tax or post-tax into a monthly paycheck that starts 2+ years from now. Longevity annuities are purchased for the same reasons as immediate annuities, but earlier on. Because of the longer deferral period – time between purchase and income starting – insurers can offer more income per dollar contributed. The longer you delay your income start date, the greater the size of the payments they’ll be able to offer you (just like Social Security).
Qualified Longevity Annuity Contracts
The last type of income annuity is called a qualified longevity annuity contract, or QLAC. The name is complicated, but it’s actually just a specific type of longevity annuity. It was created in 2014 to allow people to convert 25% of their qualified retirement account (pre-tax savings), or up to $125,000, into guaranteed income starting as late as age 85. Typically, the government requires you to start taking money out of these pre-tax accounts at age 70 1/2, so the QLAC provides a way to delay those withdrawals (and their associated taxes).
The Personal Pension
At Blueprint Income, we’re a big fan of income annuities because of the longevity protection they provide – something we all badly need now that pensions have gone away. But, we never liked the idea that you “buy” an income annuity with a lot of money at once. So, we created the Personal Pension. It’s essentially a longevity annuity that you pay into, little-by-little, throughout your working years. You can put away money towards your Personal Pension just like you would into your 401(k) or IRA accounts, but instead of investing in the market, your savings go directly towards securing guaranteed income (like a pension) for retirement.
Customize your own Personal Pension using the Diagnostic Tool.
All in all, income annuities are a great way to diversify your portfolio and make sure that your basic retirement expenses will be covered for as long as you live. If you’re about to retire, you should be focused on immediate annuities. If you’re retiring in the near future and have assets you’d like to convert to income, focus on longevity annuities and QLACs. If you’re years away from retirement and would like to build yourself a pension over time, consider the Personal Pension.
Interested in getting some quotes for one of the good annuities? Visit our annuity calculator page here to get your quote in minutes.