How to Use an Annuity to Create Your Own Retirement Pension

There was a time when the retirement income puzzle was fairly simple. Most retirees enjoyed income from Social Security and a robust company pension, supplemented by distributions from retirement savings. Those days, however, are long gone.

Individual Pension

Fewer than 100 of the Fortune 500 companies offer an employee pension plan. That’s down from 292 as recently as 1998. Companies of all sizes and across all industries have shed their pension plans in favor of defined contribution plans, such as a 401(k).

The distinction between a pension plan and a 401(k) is important. With a pension, the burden is on the employer to fund a worker’s retirement. The employer sets aside money, manages it, and then distributes guaranteed lifetime to the worker after he or she retires.

In a 401(k) plan, the burden is on the employee to accumulate assets and generate income. As you likely know, this can be a difficult challenge. Even if you accumulate enough assets in your 401(k), IRA, or other account, you still have to manage your distributions so the funds will last through your lifetime. If you take too much money too early in retirement or suffer a market downturn, there’s a risk that your funds may not last.

Fortunately, you have options available to protect your assets and deliver reliable lifetime income. Even if you don’t have a pension, you can still create an income stream that is guaranteed for life. Annuities offer several ways to generate predictable income from your assets.

Method #1: Single Premium Immediate Annuity (SPIA)

Perhaps the simplest way to create a personal pension is with a tool known as a SPIA, or single premium immediate annuity. A SPIA lets you convert a lump sum of your savings into an income stream that is guaranteed for your life, or even for the lifetimes of you and your spouse.

SPIAs are issued by insurance companies. When you open your SPIA, the insurance company calculates a payment amount based on several factors. One is the amount that you are contributing to the SPIA. The greater your contribution, the higher your payment will be.

Another important factor is your payment duration. Most people choose lifetime payments, meaning you receive payments for your lifetime and they end when you pass away. You can also choose a joint payment option, which means the payments last for your lifetime and the life of another person, such as a spouse.

Some insurance companies offer other options as well. For example, you may be able to choose a period certain, such as 10 years. In this scenario, you receive payments for your lifetime. However, if you pass away during the period certain, your beneficiaries receive payments for the duration of the period.

Finally, insurance companies will consider your age when they calculate your payments. The older you are, the shorter your estimated payment period. Thus, everything else being equal, the older you are when you purchase a SPIA, the higher your payment is likely to be.

A SPIA can be an effective tool for creating pension-like income in retirement. SPIA benefits are guaranteed for life and paid at regular interval, making them as predictable as Social Security payments or checks from an employer pension plan.

However, it’s important to note that you usually can’t reverse your decision to purchase a SPIA. After you convert your assets to income, you can’t change your mind and pull the assets back out of the contract. If you choose to purchase a SPIA, it’s helpful to maintain other liquid assets you can use in the event of an emergency or other unexpected cost.

Method #2: Guaranteed Lifetime Withdrawal Benefit

Perhaps you like the idea of guaranteed income, but would like to retain some control over your assets. If so, you may want to consider an alternative approach. Instead of using a SPIA, you can purchase a variable annuity or fixed indexed annuity with a guaranteed lifetime withdrawal benefit.

Variable annuities and fixed indexed annuities allow you to grow your assets over time and even take withdrawals from your policy. In a variable annuity, you invest your funds in “subaccounts,” which are similar to mutual funds. Most annuities offer a wide range of options so you can build an allocation that is consistent with your goals and risk tolerance.

In a fixed indexed annuity, you receive interest based on the performance of a specific market index. If the index performs well in a given year, you receive a higher interest rate. If the index performs poorly, you may receive less interest.

A variable annuity may offer greater upside opportunity, but also more risk exposure. Fixed indexed annuities often cap your upside potential, but they also limit downside risk.

No matter which option you choose, you may want to consider purchasing an optional add-on feature known as a guaranteed minimum withdrawal benefit. These optional features allow you to withdraw a certain percentage of your assets each year, such as 5 percent. As long as you never exceed that withdrawal amount, the distribution is guaranteed for life, no matter how the contract performs.

However, it’s possible that your withdrawal amount could increase. Many benefits offer the opportunity to lock in gains. If your contract performs well and your balance increases, you may be able to lock in the higher amount and increase your guaranteed withdrawal. That kind of upside opportunity usually isn’t available in a SPIA.

Variable and fixed indexed annuities also allow for liquidity that you may not find in a SPIA. If you face a costly emergency, you may be able to take an additional withdrawal from your contract. The withdrawal could impact your guaranteed income going forward. However, you still retain some control over your funds.

Ready to create your own personal pension? Let’s talk about it. Contact us today at America’s Annuity. We can help you develop a strategy based on your needs and goals. Let’s connect soon and start the conversation.