Speak with a Registered Agent: 1-866-223-2121

Speak with a Registered Agent: 1-866-223-2121

Can an Annuity Replace Your Pension?


Traditionally, pensions have provided individuals with the peace of mind of a steady income stream in retirement. And while some employees still have a pension to lean on, many private-sector workers can no longer rely on one.  

According to a recent article from Forbes, a  study from Towers Watson found that from 1998 to 2013, the number of Fortune 500 companies offering
like pensions, dropped 86%, from 251 to 34. The major indicated factor behind the change has been cost. With life expectancy continually lengthening, pension plans have had to pay beneficiaries over longer lifetimes. But as availability of pensions lessens, individuals are left to fend for themselves and fund their own retirements.

“Fortunately, for those of us who don’t have pensions, we are able to create our own income stream — with one of the major characteristics of a pension — through an income annuity,” said Mark Perrault, a wealth management advisor at Northwestern Mutual. “That’s income that we can never outlive, income that we don’t ever have to worry about.”

But as simple as that sounds, many people are skeptical of annuities. Even though income annuities pay out in a way that’s very similar to pensions, they are complex financial products, and if you buy the wrong one, you could end up getting locked into a deal that doesn’t make sense for you.

“You have to do your research when it comes to understanding what kind of annuity product you’re buying,” said Dr. Michael Finke, chief academic officer at The American College. “But with very simple, straightforward income annuity products that are offered through insurance companies, essentially what you’re doing is buying a product that pays out like a pension, and transferring the longevity risk to an insurance company.”

Recently, Finke completed a research project that was funded by Northwestern Mutual. His project, “The Value of an Integrated Retirement Income Approach,” compared the financial impact of combining income from an income annuity and permanent life insurance with an investment portfolio. By using statistical analysis to simulate the financial experiences of thousands of hypothetical retirees, Finke was able to draw the following conclusions:

  • Retirees with only investments had a 29% chance of outliving their assets.
  • Cash value that has built up over time in a permanent life insurance policy can provide tax-efficient income in retirement. In contrast to a dollar in bond investments, having an equal amount if life insurance built up cash value potentially reduces the likelihood of a retirement income shortfall to 21%.
  • Adding a Portfolio Deferred Income Annuity to the mix may reduce the risk of a shortfall even further — to 16%. And with this strategy, even if all of the other assets are depleted, the annuity will continue to pay for a lifetime.

(Note: For each simulation, Finke assumed the retiree was 65 with $2 million in retirement assets, withdrawing 4% annually).

Finke’s research also showed that retirees were happier when they received consistent, monthly retirement income.

“I’m not saying it’s the Holy Grail, but, for a lot of people, having this as part of your financial plan can make your life infinitely better,” Perrault added.

Written by Rachel Summit

Follow Rachel, aka Finance Mama, on Twitter and Google+

For more information about the product mentioned in this article contact us here:

Information Request Form

If you have questions or would like more information, please complete this form and a licensed professional will be happy to help. For the fastest response, please select 'Phone' as your Contact Preference.

By providing your information and clicking 'Submit' above, you acknowledge that you have read and agree to this site's privacy policy. You also provide your consent to be contacted at the email address or phone number provided above (including any wireless number) by licensed agents or representatives from or on behalf of AFYI Holdings Group, LLC and other companies to provide the information requested and/or offer annuities or financial products. You understand that these calls or SMS messages may be generated using an automated telephone dialing system, a pre-recorded message, or artificial voice. Consent to receive such messages is not a condition to purchase any goods or services. You may opt out at any time by following the instructions in the messages you receive.  Receiving quotes and information through our website is free, and you are under no obligation to purchase any goods or services as a result of this request. You affirm that you are the subscriber of the provided telephone number or that the subscriber authorized you to provide the number. Message and data rates may apply. AFYI Holdings Group, LLC is committed to respecting your privacy and adhering to all applicable laws and regulations, including the Telephone Consumer Protection Act (TCPA).