Kerry Peabody, Long Term Care Insurance Specialist at Clark Insurance

We’re talking about “deferred annuities” this week, in a three part series. Here’s Part II: Immediate Annuities.

We’ve talked about “deferred annuities,” which are tax-advantaged savings & growth tools. Now let’s take a look at the other way annuities can be used – to create a guaranteed lifetime income. A pension is simply an annuity. If you don’t happen to have a pension from an employer (and we know that far fewer of us have these than used to) you can actually “buy” one, using an immediate (income) annuity.

An immediate annuity takes a lump sum and converts it to a guaranteed stream of income. The amount of income created is based upon the amount of the lump sum and the age of the annuitants, and how long you want the annuity to pay.

For instance, let’s say that Ted is 70. He’s collecting social security of about $1,600 per month, and he takes $1,000 per month of income from his IRAs. Combined, his monthly income is $2,600. He has $150,000 in CDs. He’d like to have a little bit more money to spend every month, but he’s hesitant to start drawing from his savings accounts, because he’s afraid he’ll spend them all down.

Ted decides to purchase an income annuity with $75,000 of his CD money. At age 70, this would result in $535 per month, every month, for the rest of his life, no matter how long he lives. If Ted lives to 110, that check will still be coming, every month, guaranteed. He’s giving himself some extra income, he’s still got $75,000 in savings for emergencies, and he’s guaranteed that this check will never stop coming, no matter what.

The downside to a “life only” annuity is that Ted might step in front of a bus before the entire $75,000 is paid back to him. If that’s a concern for Ted, we can fix that by adding a “period certain” to the annuity. For instance, we could say that we want Ted’s annuity to pay for the rest of his life, no matter how long he lives, or for at least 15 years. In that scenario, Ted’s monthly check would be $464 per month. If he passes away before the 15 year period certain ends, the check would go to his beneficiary every month. So, he’s guaranteed to get at least $83,520 out of the annuity – no matter what.

Also, when the money’s being paid from the annuity, only a portion of it will be taxable. For instance, in the Life Only version above, a portion of the monthly check is Ted’s money, and a portion is the growth within the annuity. In this scenario, only $145 of the $535 per month is considered taxable income.

So, once again, annuities offer guarantees, tax-advantages, and the flexibility to make your money do what you need it to do. If you have money that’s sitting idle in savings, CDs, or money market accounts, or in retirement accounts that you don’t want to leave at risk of market losses, then you can use annuities to create guaranteed savings and income for life. By combining the benefits of both deferred and immediate annuities, you can build a guaranteed, bulletproof income stream that you and your spouse cannot outlive.