Retirement means spending less time working and more time with the people you love and on activities you enjoy. But, it also requires spending money—on your housing, food, utilities and other necessities—and if you worry about whether you’ll have enough, you’re not alone. The savings in your 401(k) plans or IRAs can be affected by market ups and downs. And given the way life spans are stretching, there’s also a chance you’ll outlive your savings. A little certainty would be nice, wouldn’t it?
Three sources of guaranteed retirement income
Luckily, there are a few sources of retirement income that are guaranteed. One is a defined benefit pension plan from work—and if you’ve got one, you’re among the lucky few, as these are becoming increasingly rare. Another source of guaranteed income is Social Security. This can be a big help, but it’s not designed to replace 100% of your income, so you’ll most likely need to supplement it with funds from other sources.
There’s one other way to guarantee income for your retirement: with an annuity.
What kind of annuities can guarantee lifetime income when I retire?
Annuities come in many different “flavors” – each of which is designed to help you achieve specific goals. Let’s start with a type of annuity that is expressly designed to provide a guaranteed income stream in retirement – income annuities.
Income annuities – a “horse” of a slightly different color
Although income annuities share some similarities with their traditional counterparts, they differ in important ways. Income annuities are designed for the sole purpose of providing a guaranteed stream of income, either immediately or in the future.
An immediate income annuity typically is purchased with a single premium or “purchase payment” and requires that income payments begin within 12 months of the date your contract is issued. Income can be guaranteed for as long as you live or for a specific period of time. Because immediate income annuities guarantee a specific income amount, they offer very limited access to withdrawals, and only for some annuity options. Even if you choose an annuity option that allows withdrawals, it’s important to remember that withdrawing money from your contract can have a significant impact on the dollar value of future annuity payments.
An immediate income annuity may be worth considering if you are nearing or already in retirement; want the security of guaranteed, predictable income; and need that income to start right away. If you think you might need that money down the road and you have limited additional liquid assets, an immediate income annuity is probably not be the best choice for you.
A deferred income annuity, on the other hand, is designed to provide guaranteed future income. A deferred income annuity generally permits multiple “purchase payments” over a period of time. On the annuity date you choose, all purchase payments are combined into a single, guaranteed income stream that will continue for as long as you live; some deferred income annuities offer period certain options as well. In this sense, a deferred income annuity can be used to generate a “pension-like” stream of future guaranteed income.
A deferred income annuity differs from a traditional deferred annuity in important ways. In general, a deferred income annuity:
- Does not provide liquidity; there is no contract value or ability to make cash withdrawals, as there is with a traditional deferred annuity. The only time that distributions are made from a deferred income annuity contract is when annuity payments are made or a death benefit is paid.
- Because there is no contract value or liquidity, and your guaranteed income is paid to you over your lifetime, longer-duration, higher-yielding assets can be used to support that guaranteed income. That’s why a deferred income annuity can guarantee a higher future income amount than a traditional deferred annuity at the time you make your purchase payment(s).
If you are considering a deferred income annuity, it’s essential to have a separate source of liquid assets set aside for emergencies. It’s also important to get the facts and speak with a trusted Financial Professional.
Traditional deferred annuities – saving for long-term goals like retirement
“Traditional” deferred annuities are the kinds of annuities that you may be familiar with. They are designed to help you accumulate assets on a tax-deferred basis as you save for long-term goals like retirement. Let’s look at two basic examples of traditional deferred annuities: “fixed” and “variable”.
Fixed deferred annuities are “fixed” because they offer guaranteed, fixed interest rates. They are “deferred” because they require a waiting period before annuity payments can begin. During that period, money in your contract is credited with a fixed rate of interest and grows at a slow and steady pace. Your principal is protected as long as you don’t take withdrawals. Because you don’t pay current income taxes on the earnings in your contract until you withdraw it, more of your money remains available to benefit from that steady growth. Fixed deferred annuities also offer annuity income options that can provide guaranteed income for life. This type of annuity typically includes a withdrawal provision that allows you to access the money in your contract. It’s important to understand, however, that withdrawals may be subject to surrender charges, income tax and even tax penalties.
A fixed deferred annuity may be worth considering if you are looking for a conservative way to grow a portion of your assets and avoid market volatility. It may not be the best choice if you prefer greater growth potential (and don’t mind taking on the risk that goes with it) or if you need income that starts right away.
Variable deferred annuities – Unlike fixed annuities, variable annuities are built to provide financial market exposure. Variable annuities generally offer a broad range of investment options – from more conservative fixed accounts to riskier growth options. Like a fixed deferred annuity, the money in a variable annuity also benefits from tax deferral. You don’t pay current taxes on earnings in your contract until you withdraw them – which means more of your money remains available to benefit from potential growth. A variable annuity also offers a variety of options when it comes to receiving income – including lifetime income options.
Of course, greater growth potential involves more risk. A variable annuity can increase or decrease in value, depending on how financial markets perform. When considering a variable annuity, it’s essential to understand how the annuity works, including associated fees and expenses. Just as important, you should have a clear sense of your financial goals and tolerance for risk. A Financial Professional can help you make an informed decision on whether a variable annuity is right for you.
So which annuity should you consider?
That depends on many factors. With any annuity, it’s important to get the facts before making your decision. Retirement is your reward for decades of hard work—and part of that work is making sure you’ll have enough money for the kind of retirement you want. If you are looking for an additional source of predictable income now or in the future or a product that is designed to help you accumulate assets on a tax-deferred basis, annuities may be an option worth exploring.
The information provided is not written or intended as specific tax or legal advice. MassMutual, its employees and representatives are not authorized to give tax or legal advice. Individuals are encouraged to seek advice from their own tax or legal counsel. Taxable withdrawals are subject to ordinary income tax and, if made prior to age 59½, may be subject to a 10% federal income tax.
Guarantees are based on the claims-paying ability of the issuing company and do not apply to the investment performance or the safety of amounts held in the variable investments.
Before purchasing a variable annuity, you should carefully consider the investment objectives, risks, charges and expenses of the variable annuity. For this and other information, obtain the prospectus from your registered representative. Please read the prospectus carefully before investing or sending money. You may also obtain the prospectuses (or summary prospectuses, if available) for the annuity’s underlying investment choices from your registered representative.
Insurance products issued by Massachusetts Mutual Life Insurance Company (MassMutual) (Springfield, MA 01111-0001) and its subsidiaries, C.M. Life Insurance Company and MML Bay State Life Insurance Company (Enfield, CT 06082).
Securities offered through registered representatives of MML Investors Services, LLC (MMLIS), Member SIPC® (www.SIPC.org), or a broker-dealer that has a selling agreement with MML Distributors, LLC (MMLD), Member SIPC®, or MML Strategic Distributors, LLC (MSD). MMLIS, MMLD, and MSD are subsidiaries of Massachusetts Mutual Life Insurance Company (MassMutual), Springfield, MA 01111-0001, Members FINRA (www.FINRA.org).