Diversifying your retirement income can keep your taxes lower and add some stability and predictability to your financial plan.

When you’re building a plan to generate retirement income, annuities can be great tools to both accumulate assets and serve as a source of stable lifetime income. The guarantees baked into an annuity can also engender peace of mind, because you’ll have the option to receive the same monthly income no matter what’s happening in the market. But is an annuity a good investment?

Well, to be frank, that’s probably the wrong question to ask. For one, an annuity isn’t an investment like a stock or bond; rather, it’s a contract between you and an insurance company. That makes it a unique asset that’s different than other retirement vehicles, IRAs or even Social Security.

The better question to ask is, “How does an annuity strengthen your financial plan?”


If you’re a long way from retirement, an accumulation annuity can help you save while enjoying the potential for tax-deferred growth. While you could eventually get your money back from an accumulation annuity once it hits certain milestones, many people choose to convert accumulation annuities into a stream of income to provide regular, guaranteed payments. While you won’t pay taxes during accumulation, you may pay income taxes on a portion of the withdrawals you make or payments you receive.

Fixed annuities grow at a fixed rate and are a good option for someone seeking more certainty.

Variable annuities do not grow at a fixed rate, as they can have exposure to the markets through subaccounts that you choose. This means that the growth rate of your annuity can fluctuate*, but annuity providers often add riders that can guarantee a minimum level of income or return.


As you get closer to retirement, you’ll likely want to skip right to an annuity that provides regular payments. It’s important to note that income annuities discussed below should never be considered as “investments” since they have no cash value and cannot be withdrawn from under any circumstances.

Income annuities are often purchased as people approach or have started retirement. You make a lump sum premium contribution to a financial institution, such as an insurance company, and the company, in turn, will pay you a guaranteed, regular income for the rest of your life. The level of income depends on a number of factors, including how much you paid in, and how long you’re expected to live.

An immediate income annuity is exactly what it sounds like — you make a lump sum contribution, and payments back to you start immediately.

There are also deferred income annuities, which don’t begin paying out for a pre-determined period of time. Payments from a deferred income annuity are typically higher than what you would get with the same premium toward an immediate income annuity. Some deferred income annuities are participating and have the potential for payments to grow through dividends**.


A little bit of everything can help a retirement go a long way.

A good plan in retirement generates income from several different sources to help you stay within a desired income tax bracket and shield your savings from a variety of risks. That means an annuity isn’t necessarily better or worse than investments in the market. Instead, every financial product fulfills a different need. Investments can generate tax-advantaged growth to stay ahead of inflation and provide the optionality of taxable (401(k) or IRA) and non-taxable income (Roth IRA or 401(k)) in retirement.

Deferred fixed annuities may not have the upside of an aggressive investment strategy, but they don’t need to. That’s because an annuity’s job is to hedge longevity and market volatility risk in your portfolio, but they can also be used for tax-advantaged growth. Lifetime guarantees ensure you’ll have some money coming in the door no matter how long you live or what happens in markets.

Income annuities, along with Social Security and other guaranteed income sources, provide a floor or safety net for your monthly income that investments alone can’t provide. Income annuities bring consistency and reliability to your financial plan, and that goes a long way reducing worries about the future. If you’d like to explore more ways to diversify your income in retirement, reach out to a financial advisor to get a conversation started.

*The performance of variable funds is not guaranteed, subject to market risk including loss of principal. No investment strategy can guarantee a profit or protect against loss. Variable annuities are considered long-term investments, potentially suitable for retirement and other long-range goals.

**Neither the existence nor the amount of a dividend is guaranteed on any contract in any given contract year. Some policies may not receive any dividends in a particular year or years, even while other policies receive dividends. Dividends paid can be taken in cash or used to purchase increased income payments.

Income annuities (either immediate or deferred) have no cash value and once issued they can’t be terminated (surrendered). The original premium paid is not refundable and cannot be withdrawn. With any annuity, distributions may be subject to ordinary income tax and a 10 percent IRS penalty if taken prior to age 59 ½. Guarantees in an annuity are backed solely by the claims-paying ability of the issuer.

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