Making Sense of Annuities for Retirement

by Barbara Nevins Taylor

Phil K thinks his life is about to change and he wants to plan for what may happen. He’s a senior vice president at a California electronics company that has steadily lost business as its U.S. tech customers outsourced work to China and other cheap labor markets.

The firm’s realignment may leave Phil without a job. He’ll be 65 then and eligible to collect Social Security. But he faces a steep income drop and that’s a big concern.

So he sat down and calculated. “I put down all of my statistics and sources of income. I looked okay. But I wanted to increase my cash flow so that I would never have to look over my shoulder and I would know that my cash flow, my income, would exceed my expenses,” he explains.

Phil and his wife Susan, who is 61 and still works as a registered nurse, own their home in Ventura County, California. They also own an  investment property and have a portfolio of stocks and bonds.

But Phil worries about his monthly income and when someone suggested an annuity, he took a look.

“After doing a lot of research, I found out annuities are very complex and complicated. You can talk to 100 people and get more than 100 opinions,” he says.

Phil’s right. It seems as though someone really smart, or linguistically confused, stayed up late to create a language and a series of  investment plans that befuddle most of us.

Yet, I was surprised to learn from the Insured Retirement Institute (IRI) that the word and annua, and  the concept of this kind of investment, first popped up in ancient Rome. Apparently, Romans could make a one-time payment in a contract called an annua and in return get an annual payment for the rest of their lives.

Today annuity’s are generally sold through life insurance companies, although they are not life insurance.




Here’s How it Works

Basically, you invest a specific amount of money and you’re guaranteed a specified return. Annuities are attractive to a lot of people because you invest, you get a return and you avoid the volatility of the financial markets. After the  fiscal crisis of 2007-2008, a study by the Insurance Retirement Institute and Cogent Research found 63% of investors said market swings make them more likely to consider an annuity.

If you start to think about this early when you’re in thirties, forties or fifties you’re  likely to choose a Deferred Annuitiy. That allows you to invest a lump sum or make regular payments in a tax deferred plan. When you set this up, you can decide the age when you want your annuity payments to begin.

Then, when that time rolls around, you’ll get a check every month. There are a number of variations on this theme that include variable investments that connect your investment to market or company performance.

Depending upon the contract you make, you might be able to withdraw money early, or take partial payments before you retire.

For people like Phil, nearing retirement age, immediate or almost immediate gratification is the key.

And that’s when an Immediate Annuity might make sense. You put a specified amount of money in and the annuity payments begin right away. You can do this with a lump sum from savings, or from an IRA or 401 (k) plan.

You can also choose an annuity for a specific period of time, say ten years. You receive money every month and when the ten years are up, the payments, or pay out, equal your original investment.

With some plans, monthly payments continue for as long as you live. But as with many other investments, you’ll generally have to pay fees or charges associated with your annuity.

After Phil learned about the many choices he had, he realized he needed help.

His banker gave him a brochure about variable annuities and it made him nervous. He says, “I read the 200 pages and I went back to the banker and said it’s too complicated and risky and it’s exactly why I don’t want something like this.”

Then, he realized that he had a valuable resource he hadn’t yet tapped.

Savings and Retirement Sign


He called his long-time insurance consultants in New York at the Blank Financial Group. He had worked with the husband and wife team Howard and Wendy Blank for years. He sent them a four page spread sheet, which outlined his financial situation, and they had what they needed to make a sensible recommendation.

Wendy explains, “We went over the financials with Phil and took a look at how he had his investments allocated and what his income might be when he retired. We advised that  he take a small portion of his investment portfolio from his IRA and put it into an annuity that guaranteed income.”

That was language that Phil understood and he moved quickly on the advice. He took about $100,000 from his IRA and put it into a New York Life annuity called a Guaranteed Lifetime Income Annuity with a guaranteed minimum term of 15 years.

While this is an immediate annuity, Phil deferred the payments he’ll receive by about a year. So that beginning August 2014, he’ll get $560.56 every month. That monthly payment continues for the rest of his life.  

By the time he’s 80, the payments he will have received will equal his investment. And the money he continues to receive will be like frosting on the cake.

He feels it’s a win-win for him. ” I’m gonna get cash every month for the rest of my life. How can this be anything but good?” he asks.

Wendy Blank says, “Putting money that’s sitting in an IRA or 401 (k) into an annuity is a pain free way to generate income and you can start with an investment of as little as $10,000. But everyone’s situation is different and that’s why it’s really important to get advice.”

There is one thing that you might want to consider before following Phil’s lead.

He calculated what he thinks he needs to live on, but he also has investments that he can turn into cash if he has a medical emergency, or some other unexpected event that his insurance doesn’t cover. University of Pennsylvania Wharton School Economists Felix Reichling and Kent Smetters suggest that only 37% of American households should turn their income into annuities because the rest won’t have enough cash on hand when they need it.

So this is something that you really want to look at. That’s why it’s a good idea to get advice from people who have your best interests at heart.

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Barbara Nevins Taylor

As the winner of 22 Emmy Awards and a slew of journalism honors and awards, I created to give you the straight story about complicated stuff. Tell us what you want to know and we'll get you the answers.

One thought on “Making Sense of Annuities for Retirement”

  1. The tax disadvantage of annunities is that their distribution is taxed as ordinary income; e.g, not at the current rate at which dividends are taxed. Given your level of income this could be a problem or not. Several of the discount brokers (e.g., Vanguard, Fidelity, etc.) offer low cost annunities–you are not paying the high commission you would pay if you bought an annuity from an insurance sales person. Generally, the older you are when you buy an immediate annuity the larger the monthly payment

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