Income5 min read

Concerned about retirement income?

Understand how annuities can turn part of your savings into income, where they may fit, and the fees, access restrictions, and guarantees to review before deciding.

Saving for retirement and creating income in retirement are different tasks. Once paychecks stop, the questions change: which expenses need dependable income, how long might the money be needed, and what flexibility should remain?

An annuity is one tool to understand, not a universal answer. It is an insurance contract in which you pay a premium or premiums in exchange for benefits defined by the contract. Some arrangements provide income for a set period or for life. Lifetime income is not automatic with every annuity; the payout option or qualifying income benefit must provide it.

Start with your income gap

List essential expenses separately from discretionary spending. Compare those needs with expected Social Security, pensions, and other income sources. Consider taxes, healthcare costs, and how expenses could change if one spouse dies.

If there is a gap, compare possible approaches, including planned withdrawals and insurance-based income. Keep emergency funds and near-term spending needs in mind before committing money to a long-term contract.

Immediate and deferred annuities

An immediate income annuity generally begins payments soon after purchase. The payment schedule, covered lives, and any survivor or refund features depend on the contract.

A deferred annuity postpones income or other benefits until a later time. Depending on the contract, income may come through annuitization or an optional withdrawal benefit. Those are different mechanisms with different costs and conditions.

When a contract is annuitized, access to the original premium is generally limited, and the payout decision may be irreversible. Ask what flexibility would remain.

Understand how the contract works

Common structures include:

Fixed annuities: Interest is credited under the contract's rate guarantees and renewal provisions.
Fixed indexed annuities: Interest-crediting formulas are linked to an index, but you are not directly investing in that index. Caps, participation rates, spreads, and other rules can limit credited interest.
Variable annuities: Values depend on selected investment options and can decline. Contract and investment expenses can be significant.
Registered index-linked annuities: These offer limited downside protection under specified terms, but you can still lose principal. They are not the same as fixed indexed annuities.

Even where market-loss protections apply, charges and withdrawals can reduce contract value. Understand which guarantees apply to the account value and which apply only to a specific benefit.

The trade-offs deserve equal attention

Access to money: Surrender charges, withdrawal limits, and market-value adjustments may apply. Keep money needed for emergencies accessible.
Fees and costs: Rider charges, contract expenses, investment expenses, or limits on credited interest can affect value and income.
Inflation: A fixed payment may buy less over time. Increasing-income options may start with a lower payment or involve other costs.
Household protection: Life-only, joint-life, period-certain, and refund arrangements can produce different starting payments and beneficiary outcomes.
Taxes: Tax deferral does not mean tax-free income. Taxable distributions are generally subject to ordinary income tax, and additional taxes may apply to early distributions. An annuity inside an IRA does not add another layer of tax deferral.
Insurer strength: Contractual guarantees depend on the issuing insurer's claims-paying ability and compliance with the contract. Annuities are not FDIC-insured bank deposits.

An income-benefit base used to calculate a rider's payments may not equal the account value or an amount you can withdraw as a lump sum.

Questions to ask before deciding

Ask when income can start, whether it covers one or two lives, how long payments last, and which guarantees are contractual. Request the full charge schedule and a clear explanation of what happens after an early withdrawal or at death.

Do not assume a rollover, transfer, or replacement is necessary. Compare existing benefits and any surrender costs before changing an arrangement, with tax guidance where appropriate.

The takeaway: An annuity may address part of a retirement income need, but its guarantees must be weighed against cost, liquidity, inflation, and your broader household plan.

This is general education, not a recommendation to purchase an annuity or move retirement assets. Product availability and terms vary by insurer and state.