Remember when pensions were part of every job, and every retiree had one? Pensions were lavish; they paid the pensioner a fixed sum each month for their entire life, and in most cases, at least a portion was paid to the surviving spouse at death. While pensions may be a thing of the past, the concept of a qualified retirement benefit that pays a guaranteed monthly amount for life is not. Instead of a company pension, they now form self-funded immediate fixed annuities.
Immediate fixed annuities may as well be a distant cousin to pensions because they provide and guarantee a retirement benefit. Some of the similarities include the following:
- A guaranteed monthly payment for the annuitant’s life, regardless of the actual growth of the underlying principle.
- Optional death benefit for surviving spouse – for a smaller monthly payout, if the annuitant dies before receiving enough payments to equal a return of principal, their beneficiaries will continue receiving funds.
- Annuities, like pensions, offer a low-risk, guaranteed return. While this return may not be as substantial as that of more high-risk investments, it is perfect for conservative retirement planning.
While many aspects of the two retirement benefits are similar, there are also many differences. The most crucial difference is that an annuity is self-funded, whereas the pensioner’s employer funds a traditional pension. This difference introduces several considerations that you must make before you buy an annuity-considerations that would not matter in an employer-sponsored plan, like:
- Because annuities guarantee a specific payout based on the original contribution, you generally can’t remove additional funds after purchasing the assistance. If you put your life’s savings into an immediate annuity, you may no longer have access to the funds in an emergency. Some newer products offer increased access to funds, but you usually give up something in return, such as a lower monthly payout.
- Surrender charges will be imposed if you can access the funds and remove a lump sum. This could negate any interest growth you’ve experienced, cut into your principal, and reduce the annuity’s monthly income.
- Your heirs will generally not inherit any remaining annuity value after your death. While this may not be a concern in an employer-sponsored pension, it should be considered when contributing to a straight-life immediate annuity.
If the concept of an annuity for funding retirement benefits appeals to you, call me today about the many flexible annuity products available. You may find that while a sober life immediate annuity does not fit your needs, a joint and last survivor or period certain annuity does.
Liquidated earnings are subject to ordinary income tax, may be subject to surrender charges, and, if taken before age 59 1/2, may be subject to a 10% federal income tax penalty.