For many individuals approaching or living in retirement, reliable income becomes a top priority. While savings and investments provide flexibility, not all sources of retirement income are predictable. That’s why some retirees consider including annuities in retirement income planning. These insurance-based products can offer structured payments that supplement other income sources like Social Security and investment withdrawals.
Understanding how annuities work—and when they may or may not fit into your overall strategy—can help you make informed decisions based on your needs and preferences.
What Are Annuities?
An annuity is a financial product typically offered by insurance companies that converts a lump sum of money into a stream of payments over time. These payments can be structured in different ways—monthly, quarterly, annually—and may last for a specific period or for the rest of your life.
There are several types of annuities, including:
- Immediate annuities: Begin payments soon after purchase
- Deferred income annuities: Delay income until a future date
- Fixed annuities: Aim to provide consistent payments, taking into account market performance
- Variable annuities: Payments vary based on investment performance
- Fixed indexed annuities: Offer growth potential tied to a market index with certain protections
Each type serves a different purpose, and the right fit depends on your income goals, time horizon, and tolerance for market fluctuations.
The Role of Annuities in Retirement Income Planning
Annuities can complement other income sources by helping provide steady, scheduled payments. This predictability may be useful when planning monthly budgets or covering essential expenses such as housing, healthcare, or food.
In the context of retirement income planning, annuities may help with:
- Creating lifetime income: Some annuities offer payments that continue as long as you live, subject to market conditions
- Reducing reliance on portfolio withdrawals: By covering fixed expenses with annuity payments, you may allow investment accounts more time to grow or recover from volatility
- Addressing longevity risk: Annuities can potentially provide income support in later life, depending on individual circumstances and market conditions
Including annuities in retirement income planning doesn’t mean replacing your portfolio or other strategies—it means supplementing them based on your specific needs.
Evaluating If an Annuity Fits Your Plan
Deciding whether to include an annuity in your retirement strategy involves evaluating several key factors:
- Income Needs: Do you have a predictable income gap that needs to be filled?
- Risk Tolerance: Are you comfortable relying solely on market-based investments, or would you prefer to have a portion of your income structured?
- Time Horizon: Are you looking for immediate income or income at a later date?
- Liquidity Needs: Will you need access to the funds used to purchase the annuity?
It’s important to weigh the pros and limitations of annuities carefully. While they offer stability, some contracts have fees, limited liquidity, or restrictions that may not be appropriate for every situation.
Customizing Your Strategy with Partial Annuities
You don’t have to annuitize your entire retirement portfolio. Some retirees choose to use a portion of their savings to purchase an annuity while keeping the rest invested or available for other uses. This approach allows you to balance structure and flexibility.
For example, one strategy might involve:
- Using Social Security and an annuity to cover basic living expenses
- Drawing from investment accounts for discretionary or variable spending
- Retaining access to a portion of assets for emergencies or legacy planning
This structure can help support both income predictability and long-term flexibility.
Tax Considerations
The income from annuities may be subject to taxes depending on how they’re funded:
- Annuities purchased with after-tax dollars: Only the earnings portion of each payment is taxable
- Qualified annuities (funded with pre-tax dollars like IRA rollovers): Payments are generally fully taxable as ordinary income
- Roth-funded annuities: Qualified withdrawals are typically tax-free
Understanding the tax implications of an annuity in the context of your broader income plan is an important part of making an informed choice.
Reviewing Annuities as Retirement Needs Change
Your retirement income strategy should be reviewed periodically to reflect changes in lifestyle, expenses, health, and financial priorities. Even if you’re not considering an annuity today, your needs may shift over time.
Whether you’re looking to simplify your income sources, reduce market reliance, or plan for longevity, annuities may become a more relevant option in the future.
The Purpose of Annuities in Retirement Income Planning
Annuities are not right for everyone, but they may play a role in certain retirement income strategies—especially for those who want to create predictable income streams or reduce reliance on investment withdrawals. Their value lies in how they complement your existing plan and help support your specific retirement goals.
Talk to SageGuard Financial Group About Income Planning with Annuities
At SageGuard Financial Group, we help clients evaluate whether annuities in retirement income planning align with their personal goals, comfort level, and overall financial strategy. If you’re curious about how structured income could support your retirement lifestyle, contact us to explore your options in more detail.
