Could Guaranteed Income Fit My Retirement Plan?

Educational PurposeThis article provides a framework for evaluating whether guaranteed income from an annuity may have a role in a retirement plan. It does not determine whether an annuity is appropriate for a particular person. That decision depends on the individual’s retirement expenses, existing income sources, available assets, need for liquidity, health and life expectancy considerations, risk tolerance, inflation concerns, family and legacy priorities, tax circumstances, and understanding of the proposed contract.

1. Begin With the Retirement Need

Do not begin by asking:

“Should I buy an annuity?”

Begin by asking:

“What retirement problem am I trying to solve?”

Possible concerns may include:

• Covering essential monthly expenses.
• Creating income that continues for life.
• Replacing part of a paycheck.
• Addressing the risk of outliving savings.
• Providing income for a surviving spouse.
• Reducing dependence on regular investment withdrawals.
• Delaying income until later retirement.
• Creating greater predictability.

A clearly identified need makes it easier to determine whether an annuity should be reviewed or whether another strategy may be more appropriate.

2. Calculate Essential Retirement Expenses

Begin by estimating the expenses that must be paid regardless of market conditions.

Separate essential expenses from flexible expenses such as:

• Travel.
• Entertainment.
• Gifts.
• Optional home improvements.
• Hobbies.
• Other lifestyle preferences.

Guaranteed income may be evaluated differently when the purpose is to cover essential needs rather than optional spending.

3. Identify Existing Retirement Income

Before considering an annuity, list income already expected from sources such as:

• Social Security.
• Employer pensions.
• Government pensions.
• Part-time employment.
• Business income.
• Rental income.
• Existing annuities.
• Other reliable income sources.

Social Security retirement benefits may provide monthly income to eligible workers, and the amount depends partly on earnings history and the age at which benefits begin. Individuals can review estimated benefits through the Social Security Administration’s retirement-planning resources.

4. Identify the Income Gap

Use the following calculation:

Essential monthly expenses − dependable monthly income = estimated income gap

Essential monthly expenses: $________________

Dependable monthly income: $________________

Estimated monthly income gap: $________________

An identified gap does not automatically mean an annuity is needed. The household may also consider systematic withdrawals from retirement accounts, cash reserves, bond or investment income, employment income, reduced expenses, delaying retirement, delaying certain retirement benefits, or a combination of several strategies.

The purpose of the calculation is to identify the amount of income that may need to come from savings or other retirement resources.

5. Consider Longevity Risk

Longevity risk is the possibility of living longer than expected and exhausting available assets.

Lifetime income may help transfer part of this risk to an insurance company. Investor.gov explains that lifetime annuity income can protect against the risk of outliving the assets allocated to that income arrangement.

Questions to consider include:

• How long might retirement last?
• Is longevity common in the family?
• Does the household have a pension?
• Would one spouse face an income reduction after the other spouse dies?
• How much of the household’s essential spending depends on investment withdrawals?
• Would predictable income reduce the risk of spending too quickly?

An annuity may address longevity risk for the money placed into the contract, but it does not eliminate other risks such as inflation, unexpected healthcare expenses, insurer risk, or poor planning with the remaining assets.

6. Decide How Much Income Needs a Guarantee

A household does not necessarily need every dollar of retirement income to be guaranteed.

One possible approach is to compare:

• Essential expenses.
• Existing guaranteed or dependable income.
• The remaining monthly gap.

7. Protect Liquidity Before Committing Money

Annuities are generally designed for long-term purposes. Withdrawals or surrender may result in contract charges, taxes, possible tax penalties, and reductions in future benefits.

Before placing money into an annuity, consider whether sufficient assets will remain available for:

• Emergency expenses.
• Home repairs.
• Vehicle replacement.
• Healthcare and long-term care needs.
• Family emergencies.
• Taxes.
• Travel or relocation.
• Major purchases.
• Other short-term needs.

Funds expected to remain liquid: $_________________________

Emergency reserve: $_________________________

Money that may be needed during the surrender period: $_________________________

A strong income guarantee may still be unsuitable when obtaining it leaves the household without adequate accessible funds.

8. Consider the Household’s Other Assets

Review how retirement assets are currently divided.

An annuity should be reviewed as part of the complete retirement plan—not separately from investments, cash, property, insurance, taxes, and family obligations.

Concentrating too much of a household’s available money in contracts with limited liquidity may reduce flexibility.

9. Decide Which Income Structure Is Needed

Guaranteed-income options may include:

Immediate income

Income generally begins relatively soon after the purchase.

Deferred income

Payments begin at a future date.

Lifetime income for one person

Payments continue according to the contract while the covered individual is alive.

Joint-and-survivor income

Payments may continue while either of two covered individuals remains alive.

Life with a guaranteed period

Payments continue for life, with payments to a beneficiary for the remainder of the selected period when death occurs during that period.

Lifetime-withdrawal rider

The owner may take contractually calculated withdrawals without formally annuitizing the contract, provided the rider’s requirements are followed.

Income elections have different payment amounts, liquidity provisions, fees, and beneficiary outcomes. Many annuity contracts allow payments for a selected period or for one or more lifetimes.

10. Compare Predictability With Flexibility

Guaranteed income may provide:

• Predictable payments.
• Protection against outliving the assets allocated to the contract.
• Reduced dependence on short-term market movements.
• Income for one or two lives.
• Greater confidence when planning recurring expenses.

Possible trade-offs may include:

• Reduced liquidity.
• Surrender charges.
• Irreversible income elections.
• Limited beneficiary value under certain options.
• Rider fees.
• Lower growth potential.
• Restrictions on withdrawals.
• Dependence on the issuing insurer.

The relevant question is not simply whether guaranteed income is desirable. It is: “Are the benefits of predictability worth the access, growth, cost, and legacy trade-offs required by this contract?”

11. Evaluate Inflation Risk

A fixed monthly payment may remain the same while the prices of housing, food, healthcare, utilities, and transportation rise.

Ask:

• Will the payment remain fixed?
• Can it increase?
• How is any increase calculated?
• Is an inflation-related feature available?
• Does that feature reduce the starting payment?
• Is the increase guaranteed or conditional?
• What assets outside the annuity may provide long-term growth?

A retirement plan may need both income for current expenses and growth potential to address future purchasing-power needs.

12. Review Health and Family Considerations

Health and family circumstances may influence how income options are evaluated.

Consider:

• The health of each spouse.
• Family longevity.
• Whether one spouse is financially dependent on the other.
• Whether survivor income is needed.
• Whether beneficiaries are expected to receive remaining assets.
• Whether adult children or aging parents require support.
• Whether long-term care expenses may be significant.
• Whether accessible assets will remain for emergencies.

A life-only payment may provide more income than an option with continued survivor or beneficiary protection, but payments may stop at death. Adding a guaranteed period or joint-survivor protection may reduce the payment because the insurer may be required to pay for a longer period.

13. Understand What Happens at Death

Ask what beneficiaries receive when death occurs:

• Remaining contract value.
• A stated death benefit.
• Remaining guaranteed-period payments.
• Continued survivor income.
• Return of premium.
• No additional payment under a life-only election.
• Another contract benefit.

The answer may differ depending on whether death occurs during the accumulation period, before income begins, after annuitization, while a lifetime-withdrawal rider is active, after the contract value reaches zero, or under another contract condition.

Do not assume that beneficiaries will receive the original premium or the displayed income base.

14. Understand the Tax Treatment

The taxation of annuity payments depends on the type of money used to fund the contract and how distributions are received.

Distributions may be fully or partly taxable. Payments received before age 59½ may also be subject to an additional 10% federal tax unless an exception applies.

Before making a decision, ask:

• Is the annuity funded with pretax or after-tax money?
• Is it held inside an IRA or workplace plan?
• How will withdrawals be taxed?
• How will annuitized payments be taxed?
• Will an exchange or transfer have tax consequences?
• Could state income taxes apply?
• Will the income affect other tax planning?

A qualified tax professional should review the expected treatment before money is transferred or income begins.

15. Evaluate the Insurance Company

The guarantees in an annuity contract are supported by the issuing insurance company’s financial strength and claims-paying ability.

Before relying on those guarantees, review:

• The full legal name of the insurer.
• Independent financial-strength ratings.
• Whether ratings have recently changed.
• The company’s claims-paying history.
• The contract’s guarantee language.
• Applicable state insurance protections.

The NAIC notes that an insurer may guarantee some contract values but not others, and guarantee periods may differ. Financial-strength ratings are opinions and may change. They do not eliminate insurer risk.

16. Compare the Annuity With Alternatives

Before purchasing, compare the proposed contract with other ways of addressing the same need.

This comparison does not suggest that the alternatives are equal. Each has different risks, costs, guarantees, taxes, and responsibilities.

17. Warning Signs That More Review Is Needed

Annuity recommendations should be evaluated using the purchaser’s age, financial situation, liquidity needs, time horizon, objectives, and existing assets—not simply the advertised contract features. FINRA identifies liquidity needs and time horizon as important considerations when evaluating financial recommendations.

18. Guaranteed-Income Fit Worksheet

19. Questions to Answer Before Deciding