Holly Peterson

We all like guarantees in life. But as the saying goes, death and taxes are the only real guarantees.

Well, there’s another (quite valuable) guarantee you can ensure — retirement income.

You can set up your own “personal pension” by using an annuity. It’s guaranteed by the annuity carrier and can pay you income for life, no matter how long you live.

Misunderstood Tool

“Annuity” can be a dirty word in some circles. You may have heard horror stories of high fees and underwhelming gains.

But an annuity is just a financial tool used to manage risk. Like any tool, it’s has pluses and minuses.

An annuity provides financial protection against the risk of living too long and being without income during retirement. It can serve as a long-term savings plan that accumulates assets on a tax-deferred basis for retirement, or it can convert retirement assets into a stream of income. Or it can do both.

They’re certainly not for everyone. But in the right scenarios, they work well.

With annuities, you transfer the risk of making your money last to an annuity carrier. This protects your money from market downturns like the ones in 2000, 2008, and those forecast over the next few years.

Popular Policies

Several different types of annuities exist, each with their own benefits and limitations. Below are four types and examples of when they’re beneficial.

Immediate Annuity

A single premium immediate annuity, known as a SPIA, requires a lump-sum, up-front premium and provides an income stream that could last the rest of your life depending on how you set it up.

The major drawback is there is no liquidity. Once you pay, you can only recover the money through the scheduled payment stream.

Fixed annuity

A fixed annuity is like a certificate of deposit (CD) from a bank. You deposit money and the annuity carrier guarantees the principal along with a set rate of return. While other annuities usually offer better return potential, fixed annuity interest is guaranteed and predictable.

Fixed annuities are low-risk and unaffected by the stock market. They provide a guaranteed interest rate over the length of the annuity, which typically ranges from three to 10 years and often have better returns than a CD.

Variable annuity

Variable annuities are directly tied to the market and all its ups and downs. That means you can lose money with them. There is usually an option to guarantee income, but it won’t protect your principal from loss.

With these annuities, any gains depend on the performance of the policy’s underlying sub-accounts, which are like mutual funds. There is plenty of upside, but you can also lose money, so be careful.

Fixed-index annuity

These annuities allow you to participate in market gains, while protecting the principal from market loss. In fact, you’re guaranteed to never lose money because of a market decline, which offers a high degree of safety. However, your money isn’t actually invested in the market. It’s tied to a market index.

Fixed-index annuities (FIAs) offer tax deferral and the ability for your money to grow. You can fund them with a single lump-sum payment or add money in over time. FIAs can also be purchased with money from a “qualified” plan like an IRA or 401(k).

Earnings grow tax-deferred, meaning you won’t pay income taxes until you take money. This is especially important when you buy an FIA with after-tax funds.

Many FIAs offer bonuses to sign up. However, those often come at the expense of lower potential gains. Make sure you conduct due diligence. These products can be complex, so work with a professional to make sure you understand everything.

Get Help to Secure Your Income

Guaranteeing income for your essential expenses in retirement — think shelter, food, medical care and so on — brings incredible peace of mind. With a “personal pension,” you can rest easy knowing you have a plan for the critical expenses for the rest of your life.

That said, deciding if an annuity is right for you is a big decision.

For example, because of the liquidity restrictions, money used to fund an annuity must not be needed for critical expenses during the policy term. Similarly, the amount dedicated to an annuity must be carefully weighed relative to other assets to maintain a proper allocation.

Holly Peterson is the owner of Elite Retirement Strategies and a former radio show host. You can find her online at eliteretirementstrategies.com or by calling 208-252-4345.