It is likely that your parents or grandparents retired with a pension benefit that guaranteed a monthly check for the rest of their life. Times have changed, however, and most companies no longer offer traditional pension plans. Since the introduction of the 401k, the retirement savings burden has slowly shifted to the employee.

While you may be able to amass substantial retirement assets in your 401k and other vehicles, how will you convert these assets into an income stream during retirement? You might consider converting at least a portion of your retirement savings into a guaranteed lifetime income stream - your own version of regular “pension” payments.

Creating an Income

When you purchase an immediate annuity, you pay a lump sum to the issuing insurance company in exchange for monthly income payments. These monthly payments are guaranteed to continue for as long as the annuity contract specifies.*

Many immediate annuities offer a choice of payout options. For example, you might choose income payments that last for the rest of your life, or over the joint lifetimes for you and a beneficiary, such as your spouse. Monthly payments received under the joint-lifetime option are smaller than with a single-life only payout plan, but offer a way to provide an income stream to a surviving spouse.

Another option is to elect income for your lifetime with a period certain option. For example, if you elected a 10-year period certain option and you died before the end of 10 years, your beneficiaries would continue to receive payments until the period certain option expired.

How Payments Are Taxed

If your annuity was purchased with after-tax dollars, a portion of each income payment is considered a tax-free return of principal. The rest is subject to ordinary income taxes. Payments received from annuities funded with before-tax IRA assets (Traditional IRAs, 401k’s, etc.) would be fully taxed as ordinary income.

Suitable for You?

Immediate annuities can offer retirees a measure of stability and predictability in a world of financial uncertainty. However, as with any financial product, they are not an appropriate solution for everyone. The fixed income payments may not keep pace with inflation (unless the annuity contract includes an inflation rider). Also, you may not be able to withdraw principal or change the payout amount, should you ever need more money. Some immediate annuities do offer special withdrawal features, but such flexibility usually reduces the monthly payments.

So, if you’re interested in taking guaranteed payments from a lump sum of existing assets, give an immediate annuity a good look. A financial professional can show you available income options specific to your situation and explain more of the benefits these unique products have to offer.

* Annuity withdrawals are generally taxed as ordinary income and may be subject to surrender charges, in addition to a 10% federal income tax penalty if made prior to age 59 1/2. The guarantees and payments of income are contingent on the claims paying ability of the issuing insurance carrier.

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