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How Annuities Can Provide Lifetime Income for a Secure Retirement

How Annuities Can Provide Lifetime Income for a Secure Retirement

Given the current economic state, annuities appeal more to consumers looking to maximize their retirement savings.

In the first quarter of 2023, sales for annuities hit an all-time high – something experts attribute to continued equity market volatility, favorable interest rates, and a potential recession.

Annuities can be a great option if you’re worried about outliving your retirement savings.

In this comprehensive article, we will explore how annuities can offer a guaranteed lifetime income and discuss, among many things, factors to consider when incorporating annuities into your retirement planning.

What is a Lifetime Income Annuity?

A lifetime income annuity serves as a long-term investment vehicle that offers a steady stream of income over an extended period, potentially spanning your entire lifetime. These consistent and guaranteed income payments are specifically structured to provide financial security, ensuring you can meet your expenses and mitigate the risk of inadequate funds in the future.

“By opting for annuitization, your initial investment, or the amount you contribute, is transformed into consistent payments that continue for as long as you require them. This gives you the much-needed peace of mind that you have an income stream you can rely upon during your golden years,” said Scott Mass, Senior Vice President, Investments at David Lerner Associates, Inc.

How a Lifetime Income Annuity Works

A guaranteed lifetime annuity operates by transforming a lump-sum premium into a dependable income stream that provides lifelong financial support. For many retirees, relying solely on Social Security benefits and investment savings may not sufficiently cover their daily expenses.

The fundamental purpose of annuities is to furnish this essential income by utilizing a two-step process: 1) Accumulation and 2) Annuitization.

In the case of immediate annuities, lifetime payments commence within a month of purchase, eliminating the need for an accumulation phase.

When you buy a deferred annuity, you contribute a premium to the insurance company. This initial investment then undergoes tax-deferred growth during the accumulation phase, which typically spans 10-30 years, depending on the specific terms outlined in your contract. Once the annuitization phase begins, as stipulated in your contract, you will begin to receive regular payments.

One of the primary benefits of annuity contracts is that they transfer the risk of market downturns to the insurance company. As the annuity owner, you are shielded from market volatility and the potential risk of depleting your funds due to longevity.

To offset this risk, insurance companies impose fees for services such as investment management, contract riders, and administrative tasks. Additionally, most annuity contracts impose surrender periods during which withdrawals from the annuity entail surrender charges.

Furthermore, indexed annuities commonly feature caps, spreads, and participation rates, each of which can impact your overall return on investment. It’s crucial to carefully evaluate the terms and conditions of your annuity contract to comprehend the potential impact of these factors fully.

By understanding these intricacies and evaluating the suitability of annuities for your individual circumstances, you can make informed decisions about incorporating them into your retirement planning strategy.

How Are Lifetime Income Annuities Taxed?

Annuities have garnered favor among numerous financial experts who advise their clients, primarily due to the potential for tax-deferred growth.

When you invest in an annuity, the growth of your investment remains untaxed throughout the duration of the contract.

The accrued taxes are deferred until the point when you start receiving income payments upon the annuity’s maturity.

This advantageous tax treatment allows for the potential accumulation of wealth over time, offering a compelling reason for considering annuities as part of your overall financial strategy.

How to Buy a Lifetime Income Annuity

Annuities are offered for sale by insurance companies, as well as select banks, brokerage firms, and mutual fund companies.

It is critical to carefully read and comprehend your annuity contract, as all associated fees should be clearly outlined within it. Do NOT buy a product you don’t understand.

The mutual fund prospectus serves as a vital resource for information regarding investment options within a variable annuity. To make informed decisions about allocating your purchase payments among the investment options, request prospectuses for all the mutual fund choices you are considering and thoroughly review them.

Before you decide to buy an annuity, ask yourself the following questions:

  • Considering my needs or age, is this annuity right for me?
  • How much annuity income will I need besides my pension, SS, and any other retirement income or investment sources?
  • Will the income be for only myself or also for someone else?
  • How much can I afford to make in premium payments?
  • How long can I leave funds in the annuity?
  • When will I need income payments?

If you’re investing in a variable annuity via a tax-advantaged retirement plan such as a 401(k) or an IRA, it is important to understand that you’ll not receive any additional tax advantages from the annuity. In such cases, the decision to obtain a variable annuity should be based on its other features and suitability for your specific needs.

Key Considerations when Incorporating a Lifetime Income Annuity:

Annuity Fees and Expenses: Insurance companies tend to be less transparent about the costs of their annuities. It’s imperative to understand the fees associated with an annuity, such as surrender charges, administrative fees, and mortality and expense charges, and their impact on overall returns.

Liquidity and Access to Funds: Potential limitations and restrictions exist on accessing funds invested in a lifetime income annuity. It’s important to align your liquidity needs with the chosen annuity type.

Inflation Protection: You should consider inflation and the potential impact on annuity income, along with available options for inflation-adjusted annuities.

Evaluating Annuities

  • Assessing Financial Needs: It’s vital to determine your retirement income needs and how an annuity can be incorporated into your retirement plan.
  • Comparing Annuity Providers: Evaluate annuity providers by considering factors such as financial strength, reputation, customer service, and product offerings.
  • Seeking Professional Advice: It’s critical to consult a qualified financial advisor specializing in retirement planning and annuities to make informed decisions aligned with your goals and circumstances.

How Do Annuities Pay Out?

Annuities present themselves in two fundamental variations: immediate and deferred, each offering distinct advantages depending on your financial objectives.

If you aim to receive annuity payments immediately, an immediate annuity is the appropriate choice. This option ensures you receive regular payments without delay, providing a predictable income stream to meet your financial needs.

On the other hand, if you prefer to defer the commencement of your annuity payments until a specific future date, a deferred annuity is a suitable option. With a deferred annuity, you have the flexibility to customize the start date of your payments according to your financial planning and retirement timeline.

By carefully considering your financial goals and timeline, you can determine which annuity configuration aligns best with your unique circumstances and objectives.

How Sure Am I That the Annuity Contract Will Pay Per the Contract?

Insurance products, including annuities, operate under strict regulations imposed by state insurance departments or commissions.

These regulatory bodies ensure that insurance companies issuing annuities are licensed and adhere to guidelines to safeguard customers from unethical practices. To guarantee compliance, insurers must meet minimum capital and surplus requirements, make deposits where necessary, and undergo regular assessments of their reserves and financial stability. These evaluations assess an insurer’s ability to fulfill future annuity obligations by considering their total liabilities, assets, and reserves.

In the case of variable annuities, additional oversight is provided by the SEC due to their classification as investment instruments similar to mutual funds. However, it’s important to note that indexed funds often do not require registration with the SEC, and fixed annuities, being non-securities, are not subject to SEC regulations. Additionally, FINRA governs the sale of variable annuities, mandating that individuals involved in such transactions hold a securities license.


Annuities offer a compelling solution for generating lifetime income and financial security during retirement. With their guaranteed income, predictability, and protection against market volatility, annuities can give workers the confidence and stability they need for a secure retirement.

Seek the guidance of a trusted annuities expert who can help you navigate the intricacies of these retirement vehicles and tailor a strategy that aligns with your unique circumstances and retirement objectives.

Material contained in this article is provided for information purposes only and is not intended to be used in connection with the evaluation of any investments offered by David Lerner Associates, Inc. These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable– we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.

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