As a retirement income planner, in addition to the Retirement Income Visions™ blog posts and MarketWatch RetireMentors articles that I write, I read a lot of retirement planning and retirement income planning (If you’ve been reading my articles, you know there’s a distinct difference between the two disciplines) articles written by other writers.
While I’m happy to see that immediate annuities are often recommended as a potential retirement income planning strategy, I get concerned when they’re touted as the only income solution, especially in today’s low-interest-rate environment.
I have discovered after questioning writers about their recommendation that knowledge about other types of income annuities is lacking in many cases.
An immediate annuity is a fixed income annuity for which annuitization begins one month after date of purchase with a single premium. For those of you who aren’t familiar with, or need to brush up on your understanding of, annuities, please refer to the following five terms that are defined in the Glossary of Terms: annuity, annuitization, fixed annuity, fixed income annuity, and immediate annuity.
From a planning perspective, assuming there isn’t an existing retirement income plan in place that includes deferred fixed income annuities, it’s my belief that the recommendation of an immediate annuity as the only income solution in many cases demonstrates a lack of planning and understanding about other types of annuity income strategies, including how they can interact to optimize an individual or family’s sustainable income.
By definition, annuitization, or the structured payout, of an immediate annuity begins one month after date of purchase of the annuity contract. Assuming that a recommendation is made today to purchase an immediate annuity with a lifetime payout, the lack of income deferral opportunity, combined with today’s low interest rate environment, is generally going to result in a relatively small monthly payment. While the payment is guaranteed by each individual life insurance carrier, subject to each carrier’s claims paying ability, and is subject to favorable income tax treatment, it nonetheless will generally be modest at best.
Assuming that you have at least five years until retirement, you have the ability to implement retirement income planning strategies that include fixed income annuities with deferred payments as part of your plan. This includes deferred income annuities (“DIA’s”) and fixed index annuities (“FIA’s) with guaranteed lifetime withdrawal benefits (“GLWB’s”), generally offered as income riders. Please refer to these terms in the Glossary of Terms if you’re not familiar with them. In addition, you may want to read the five-part series, FIA’s With Income Riders vs. DIA’s: Which is Right for You?
The deferred payment nature of DIA’s and FIA’s with income riders provides insurance carriers with the opportunity to invest your premium for an extended period of time as defined by each annuity contract. How does this benefit you? For starters, there will be no taxation of your investment between the date of your purchase and the date that you begin your withdrawals, otherwise known as tax deferral. More importantly, the deferral period provides you with the ability to receive a larger monthly income stream than a stand-alone immediate annuity solution. Furthermore, the timing of the commencement and amount of your payments can be customized to meet your financial needs.
An immediate annuity, when presented as the only income strategy, is generally not appropriate as a retirement income planning solution in many cases in my opinion. A holistic retirement income plan that includes deferred fixed income annuities is often a preferable alternative.