A Primer on Income Annuities

These days many folks, especially retirees living off investment and savings income, are in a tough situation because of the extremely low-interest-rate environment engineered by the Federal Reserve. As a result, many people are electing to purchase income annuities to bolster their spending power with a steady stream of income.

What is an Income Annuity

An income annuity is a financial vehicle, offered primarily by insurance companies, whose purpose is to provide periodic income, generally on a monthly basis. It is set up as a contract. The purchaser of the annuity pays an up-front lump sum in exchange for guaranteed future periodic payments. These payments can begin as early as one month after the lump sum is paid and last as long as the buyer remains alive.

Benefits of Income Annuities

Many investors are attracted to the benefits of purchasing income annuities. The appealing characteristics include:

• A high and guaranteed periodic income
• No taxes are due until annuity payments begin
• Iron-clad income as long the contract holder lives

For these reasons, sales of income annuities amount to well over 100 billion annually in the United States.

Types of Income Annuities

Income annuities come in a number of different variations, designed to be flexible to each purchaser’s individual situation. Here are the main types of income annuities:

• Immediate Annuity: These annuities are designed for those who are retired are very close to retiring. Income can begin in 12 months or less after the lump sum is paid by the annuity holder
• Longevity Annuity: This type of annuity begins to pay out its periodic returns one year or more in the future. It is designed for those who have not yet retired but want to have a guaranteed income when they do. It can also be used by those already retired if they anticipate a reduction in income after a certain future date.
• Qualified Longevity Annuity Contract (QLAC): This specialized type of income annuity is designed for holders of Traditional IRAs. QLACs are longevity annuities purchased with Traditional IRA savings. Income for QLACs begins after age 72 but before age 85.

Are Income Annuities Right for You?

If you are considering purchasing an income annuity, perhaps these two questions might help you make a good decision. Will your social security and pension benefits be enough to cover your living expenses? Are you looking for greater certainty in income when you retire? HAveing an income annuity can buffer the effect of uncertain and volatile markets going forward.