Income Annuities

Income annuities are a way to receive money on a regular basis rather than in a lump sum. Many people who receive a cash settlement of some sort will invest those proceeds into an annuity and receive regular payments over a specified period of time. These investment vehicles are popular with retirees or those nearing retirement. The up-front income is invested in both fixed or variable instruments, or a combination thereof. With annuities that are backed by variable investment instruments, the payments can fluctuate based on the performance of the underlying investments. For this reason, many retirees do prefer to have a fixed annuity in order to have a regular payment that they can rely on. This risk aversion will protect the income that has been invested but there will be no upside potential for the annuity to pay more.

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Frequently Asked Questions ( 9 )   Add a Question

  1. What are the disadvantages of annuities?
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    The main disadvantage with an annuity is that the money is locked up for the specified period of time that is set at the time of purchase. If an emergency arises and the principle is needed, there can be hefty fines and tax penalties with early withdrawal.

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  2. Are annuities guaranteed by their issuers?
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    Annuities are not guaranteed or otherwise backed up by the issuer. There is some risk involved especially when the underlying investments are in variable instruments. Fixed annuities are much safer and generally speaking do not lose value.

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  3. Can more than 4% of the initial investment be paid out each year?
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    Investment advisors generally stick to a 4%/year rule when it comes to withdrawing funds from a retirement account. Many annuities can pay out more than that dependent on current market conditions when the annuity is purchased. While not for everyone, annuities are definitely worth looking into as an option for retirement.

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  4. Do annuities start paying out immediately?
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    Annuities can begin paying out immediately or can be structured as a deferred annuity. Deferred annuities will begin payments at a previously agreed upon future date. Investors can continue to build up their annuity accounts prior to retirement and then begin payments.

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  5. What are the benefits of income annuities?
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    Income can be added to an annuity on a tax-deferred basis, and unlike a 401k or similar vehicle, there is no upward limit on the amount of money that can be added each year. In addition to this, many retirees prefer to have a steady stream of income that is paid regularly.

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  6. How is an annuity paid to the investor?
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    Annities can be set up almost any way that an individual may choose. The options for pay out are typcially monthly and the length of time that the payments are made can range anywhere from five to 30 years. Any amounts unpaid at the time of death will go to the beneficiary.

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  7. Are annuities guaranteed by their issuers?
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    Annuities are not guaranteed or otherwise backed up by the issuer. There is some risk involved especially when the underlying investments are in variable instruments. Fixed annuities are much safer and generally speaking do not lose value.

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  8. Do annuities make good investments?
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    Annuities are not for everyone. Those that receive a lump sum payment or who want to ensure that their retirement savings will last for a pre-determined period of time find annuities an attractive option for their retirement accounts. 

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  9. Are lifetime annuities available?
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    Annuities are available for a pre-determined fixed period of time or for the remainder of the investor's lifetime. In addition to the lump-sum payment that are used to purchase all annuities, a lifetime annuity will generally also require a payment of a premium of some type.

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