What are Guaranteed income annuities (GIAs)? An annuity is a contract, and like all contracts, it can be sticky to get out of. If you’re not fully comfortable with the terms, fees, and payout schedule of any annuity, don’t sign. That being said, if you have some form of liquid cash, as well as steady payouts from Social Security, then a Guaranteed Income Annuity can be a useful portion of your retirement plan.
What Works About a Guaranteed Income Annuity?
If you’ve had to back away from volatile stock investments to protect your retirement nest egg, a guaranteed income annuity contract can look pretty good. You turn over your cash to the annuity manager for a regular payout for the rest of your life.
The example above is known as an immediate annuity: money in equals payments out, right now. However, you can also choose to set up a delayed payout, which wouldn’t kick in unti you’re a bit older. For example, if you plan to do some traveling and have an RV lined up for when you turn 65, your fun factor could be high but costs could actually be quite low. You might not need your annuity payouts when you turn 65.
Living on the road when you’re 80 would be a much bigger problem. Instead of facing dire circumstances when you’re at your most fragile, you could set up a longevity annuity that doesn’t kick in until you reach a greater age.
Be aware that your investor risk goes up when you buy a longevity annuity; after all, you may not make it to 80. However, if your health and family history indicate that reaching a greater age is a real possibility, the monthly payouts from a longevity or deferred income annuity are much higher. Study the literature and any proposed contracts with great care.
Challenges of a Guaranteed Income Annuity
As noted above, an annuity is a contract to provide you with a monthly payout for your investment dollars. If you need out because you need or want to access a sizable chunk of your money in a hurry, the payouts can be dear. If you choose to set up a Guaranteed Income Annuity, hold some cash out so you have some room for large expenses.
There is also the concern about any remaining monies when you pass away. If you have a spouse, you’ll want to set up a joint-life annuity to make sure your spouse continues to receive payouts after you die.
One of the great comforts of an annuity is that, even if your money is all gone, you still get guaranteed payments for the length of your life. If you want any remaining monies in your account to go to your beneficiaries, study the documentation with great care.
Some annuities can be set up to make monthly payments once you turn 75 and will make them if you live to be 100, even if the original cash was wiped out on your 86th birthday. Others start paying out when you’re 80. If you die at 81, your money is gone and your beneficiaries get nothing. Figuring out this structure is your job and you need to do your homework before you put any money in the account.
Finally, consider some post-mortem financial structures to protect those that will come after you. If you have quite a lot of retirement money saved up and want it to go to your children or grandchildren for a specific purpose, a trust is a good idea. Your remaining annuity dollars can be funneled directly into an educational trust or another vehicle so you can continue to guide and assist your family after you’re gone.
When Disaster Strikes
If the organization managing your annuity goes broke, you should probably still get your regular payments until regulatory agencies can clean up the mess. However, these state agencies can only guarantee your money up to a certain point and each state is different.
Don’t put more money into an annuity than will be guaranteed by the state for reassignment to another manager. While very few annuity insurance companies went under during the financial crisis of 2008, the retirement wave is still cresting and will likely lead to more challenges for these organizations.
A Word About Taxes
Most annuities are funded with pre-tax dollars, so you’ll need to pay taxes on these dollars as they come out. This is one of the more helpful aspects of an annuity; since you can’t take out a large chunk of money without facing contractual penalties, the tax burden will be more manageable.
This is where a combination of multiple investment formats can come in handy. A Roth IRA loaded with post-tax dollars can provide you with non-taxed investment gains for big-ticket items and splurges while your annuity can steadily fund your ordinary expenses.
And a Word About Fees
There are a lot of folks who are worried about annuities because they have heard horror stories regarding high fees and payout penalties. However, the tales of annuity contracts that offer reasonable fees charged by responsive managers don’t seem to get a lot of press.
It’s important that you go with your gut on a lot of this. Carefully consider your tolerance for risk when choosing your investments, and take a good look at the contract for your annuity. What fees will be charged, and what are they based on?
If your beneficiaries are going to get a lump sum payout of remaining monies at your death and the fees of your annuity are based on a percentage of the initial balance, that administrator has gotten a very good deal while you and your beneficiaries haven’t. If the fee structure goes up as your balance goes down, question it or find another advisor.
One of the big challenges with any retirement investment vehicle is that
- we have to make decisions before we have any money, and
- we really have no idea how long we’ll need the income
It’s never a good idea to put all your eggs in one basket, nor is it a good plan to put all your retirement dollars in one account. Holding off until you’re a bit older is a good idea, but do make sure that your beneficiaries get a lump sum payout if you don’t live long enough to enjoy the payout of a deferred benefit plan.