December 26, 2018 • Retirement 101 / Articles and Insights

Retirement Talk: Discussing Guaranteed Income with Your Spouse or Partner

You’ve shared your hopes and dreams. You’ve built a life together. Now that it’s time to plan for retirement, you’re in it together as well—deciding on a retirement savings plan that makes sense for both of you, providing the retirement you’ve dreamed of together. Annuities keep popping up in discussions and in your research, and you’re intrigued about a product that can help protect your savings and offer guaranteed income in retirement. 

When it’s time to discuss annuities, it doesn’t have to be complicated. Let’s break down some of the most common questions about annuities to help you and your loved ones learn about annuities together. 

What is an Annuity? An annuity is a financial product designed to help protect you from potentially outliving your income. Your premium payment into the policy is converted into periodic payments that can last for life. When explaining annuities, it’s important to note that an annuity is the only financial product that guarantees lifetime income (aside from Social Security benefits and pension income).

Who Offers Annuities? Insurance companies who are licensed by state insurance departments sell annuities—an annuity is a contract between you and the insurance company.

How Does an Annuity Work? How Do We Get Income From It? Annuities are typically used as part of a larger retirement strategy. You pay the insurance company a premium or premiums, depending on the type of annuity you’ve chosen. These premiums accumulate and earn interest over time. Once you choose to receive the income, usually in retirement, you tell the insurance company to pay it as a lump-sum or monthly, quarterly, or annually. There may be some restrictions on the frequency of the payout depending on the annuity you choose.

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Does the Income From an Annuity Cover Both Our Lifetimes? You have the option to purchase a joint annuity with your spouse or partner, which will continue to pay out for the rest of your lives. Many annuities also offer death benefits. This means the benefits are passed on to them or other beneficiaries if you die before annuity payments begin, and in some cases, even after payments begin if there is remaining value available at your death. 

What About Taxes? Do We Get Taxed on the Annuity Income? There are a variety of annuities available, and they offer different options for managing taxes. With immediate annuities, payouts begin shortly after the contract goes into effect and your current tax rate applies to those payouts. If you purchased the annuity with before-tax dollars, you’ll pay taxes on all of your payments. If you purchased your annuity with after-tax dollars, only the amount you earned in interest will be taxable. All deferred annuities—annuities that do not begin making payments immediately—are tax-deferred, and you won’t pay taxes while your annuity is growing. Taxes are only paid when you take money from the annuity. Once you retire (and no longer receive a regular paycheck from your employer), your tax rate may be lower, so you may end up paying less taxes on this money. Your tax advisor can help plan for managing taxes in retirement, whether through annuities or other retirement strategies.

You have the option to purchase a joint annuity with your spouse or partner, which will continue to pay out for the rest of your lives. 

Are There Other Kinds of Annuities? Yes! In addition to immediate and deferred, the most common types of annuities are fixed and variable annuities. Fixed annuities guarantee a set rate of interest and protect your annuity savings from investment market losses. Fixed rate annuities declare the interest rate in advance and guarantee the rate for one or more years. Fixed indexed annuities determine the interest rate based on a formula that is guaranteed for one or more years. The formula measures the positive performance of an external market index over a period of time, typically monthly, annually, or multiple years. With all fixed annuities, you do not participate in the investment markets and you will not lose any money due to market loss.

Variable annuities let you participate indirectly in the market through the purchase of sub-accounts, which invest in mutual funds. You can experience both gains and losses depending on the performance of the investment options (sub-accounts) you have chosen. While you can suffer losses to your variable annuity savings, many variable annuities offer options (at additional cost) to help protect your savings from losses.

The beauty of having a wide variety of annuities to choose from is the ability to find one or many that work for you. A financial professional can help you find the right annuity or annuities for your retirement strategy.

What If We Need to Access the Money Before We Reach Retirement Age? You can access your money at any point, but there may be penalties or charges. If you take money prior to age 59 ½, the IRS assesses a 10 percent early withdrawal penalty and you’ll pay regular income tax on the money received. There’s also a surrender period (typically the first seven to 10 years) during which you may face a surrender fee if you make an early withdrawal. However, many annuities offer a penalty free withdrawal during the surrender period, typically up to 10 percent of your annuity value or initial premium payment. Your financial professional will know which annuities offer this feature. While you always have options to access your money in the case of an emergency, consider your annuity purchase carefully if you think there’s a high likelihood that you’ll need to do so before the surrender period is up. 

If the Return Is Guaranteed, What Are Some of the Differences Between an Annuity and a CD? Both a Certificate of Deposit (CD) and an annuity guarantee a set rate of interest. While bank CDs are designed to be shorter-term products, annuities are long-term products designed to save for retirement income. They are different products designed for different investment purposes and objectives.

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A few key differences between a CD and an annuity are the guarantees, tax treatment, and how long you receive payments from them.

  • CDs are federally insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000. An annuity is guaranteed by the issuing insurance company and can be much more than $250,000. In addition to the insurance company protection, annuities and other products issued by life insurers are protected by your state’s Insurance Guaranty Association
  • Interest earned on annuities is tax-deferred and is taxed as ordinary income rates when withdrawn. Interest earned on CDs is taxed each year as ordinary income. Both products have penalties for early withdrawals, and with an annuity you will also be subject to an additional 10 percent federal penalty for withdrawals taken before age 59 ½.
  • Finally, once a CD matures, that’s it—you receive your principal plus the accrued interest all at once, unless you choose to roll it over into a new CD term. An annuity doesn’t “mature,” and you can take lifetime payments from your annuity no matter how long you live, even if the sum of all payments exceeds your original principal.


If We’re Looking For Dependable Returns, How Does an Annuity Help Us? A fixed annuity guarantees a minimum amount of interest you will earn and can offer additional interest if market conditions are favorable. Fixed annuities also guarantee that you cannot lose money when market conditions are less favorable. Variable annuities offer the potential for higher rates of return than fixed annuities, as well as the potential for losses. 

What’s the next step? How do we decide what might be the right annuity for us? Good question. We’d recommend consulting with your financial professional, who can explain which annuity, or combination of annuities, might fit in with your goals for retirement and the rest of your retirement strategy. 

Annuities are long term financial products designed for retirement income and may not be suitable for everyone. They involve fees, expenses and limitations, including surrender charges for early withdrawals. Some include optional riders and benefits that may come at additional cost. Annuity product and feature availability may vary by state.
Bank products are FDIC insured, whereas annuity guarantees are backed by the financial strength and claims-paying ability of the issuing company. With variable annuities, guarantees do not apply to the performance of the variable sub-accounts which fluctuate with market conditions. Withdrawals are subject to ordinary income tax, and if take prior to age 59 ½ may be subject to an additional 10 percent federal penalty.
Investing involves risk, including possible loss of principal.

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