One way to make sure that you always have money coming in during retirement, in addition to Social Security and any pension payment you receive, is to turn part of your savings into payments that are guaranteed to last for the rest of your life.

If you already own a deferred annuity, you can turn that savings into a stream of lifetime income. Or you can buy an income annuity to provide guaranteed lifetime income payments. Whether an income annuity is right for you depends on your specific financial and personal situation.

Income annuities versus taking withdrawals from savings

An income annuity, technically called an immediate income annuity, allows you to maximize your income while ensuring that you won’t run out of money.

Let’s say you plan to withdraw $500 a month from your savings, figuring that your money will last until you reach the average life expectancy for your age. With this withdrawal plan, however, there’s a chance that you’ll live past your life expectancy and outlive your savings.

To decrease the chance of outliving your money you could decide to withdraw less than $500 from your savings. But then you may not have enough to live on or you may have to decrease your standard of living.  And even if you reduce the amount you withdraw, there’s still no guarantee that you won’t run out of money.

So instead of withdrawing the $500 a month from your savings, you could buy an income annuity with part of your savings that promises you $500 a month for the rest of your life. With the annuity you’ll receive the $500 a month regardless of how long you live, and you’ll also have that amount to live on right from the beginning of your retirement.

How annuity payments are determined

The payment amount you receive from an income annuity varies from company to company and is based on a number of factors including:

• The amount you use to buy the annuity. The larger your purchase premium, the higher your income payments.
• Annuity tables that project your life expectancy based on your age. If it’s a joint and survivor annuity, the payment amount also depends on the age of your joint annuitant. Generally, the older you are when you buy an income annuity, the higher the payment amount. That’s because the insurance company expects to make fewer payments and because more of your principal is repaid each time.
• Your gender. In almost all states, annuity payment amounts for women are lower than for men because women are expected to live longer and receive more payments. (This isn’t true, however, of annuity payments that you receive if you have a traditional pension plan at work; federal laws require equal treatment by employers.)
• The income option you select. Payments made to you and a joint annuitant are lower than payments made only to you. Adding a guaranteed period to continue payments to your beneficiaries if you die prematurely also lowers payment amounts.
• For fixed annuities, the interest rate guaranteed in the contract.
• For variable annuities, the performance of the investments you choose.

Article is for educational purposes only and is not intended to provide specific tax or legal advice. For answers to tax questions, please see your tax professional. For legal questions, consult an attorney.

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