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Annuities Can Create A Pension-Like Income Stream

In a recent special for USA Today, investorplace.com’s Jeff Reeves asked “Can an annuity act as your pension plan?” The short answer is yes. The majority of Americans would rather have the cushy and simple pension plans of decades ago, but unfortunately those pensions are a rarity nowadays. In 2011, only 10% of private companies had pension plans, covering just 18% of the workers in the private sector. I presume that number is already significantly lower just five years later. To put it into perspective, 80% of private sector workers had pensions only 20 years ago. Companies shifted from pensions to employee contribution plan 401k’s because pensions are expensive to offer. Since we’re not expecting any type of shift back to the pensions of old, Americans have to create their own retirement income streams. This can be done with your 401k savings if you have one of those plans or with your personal retirement savings. One of the only ways to create your own personal pension is with an annuity product.

Annuities offer a guaranteed stream of income that will last for as long as you live. This promise is why annuities can be such crucial retirement planning tools. As pensions disappear, we have to have income coming in from somewhere. You usually buy an annuity with a lump sum of money, but some products allow for multiple deposits over time. It’s important to have a lifetime income stream in place because no one knows exactly when they are going to die. If you knew your death date ahead of time, it would be easy to plan your retirement and make sure that your money lasted for as long as you live. Many conservative investors look to annuities because they so closely resemble pensions. But there are many different types of annuities and many options to consider. Not all annuity products are created equal.

The first choice you’ll have to make is whether your annuity is going to be immediate or deferred. An immediate annuity starts paying your income right after purchase, while a deferred annuity product will offer you higher income payments if you can wait to start receiving your money. This is where you have to take your personal needs and financial situation into consideration. One of the biggest decisions you’ll have to make concerning an annuity is whether you want a fixed or a variable annuity product. Fixed annuities pay you a specified return over the life of your annuity contract, while variable annuity returns will vary based on economic conditions. Both types have their own inherent benefits and drawbacks. Most notably, fixed annuities don’t account for any inflation increases and variable annuities could lose value if the markets perform poorly. But fixed annuities guarantee your returns and variable annuities offer the potential for larger increases that keep up with inflation and even surpass it. Another option is to purchase a fixed equity indexed annuity, which offers the guarantees of a fixed rate annuity along with some market upside potential. Your payments will be lower and these products are sometimes considered complex.

It’s important to consider the benefits and drawbacks of each type of annuity product before deciding to purchase one. There are many different riders that can be added as annuity options including death benefits and protection for inflation. Take your personal financial situation and goals into consideration when you are looking to buy an annuity. Annuities can create a lifetime income stream similar to a pension for those who don’t have guaranteed income from their employer.

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