Annuities, like life insurance, are founded on the unpredictability of human life. Consider the following from UCLA Professor Shlomo Benartzi: 10 of your high school friends retire at 65. The likely first death will be at 69, and the last at 99 -- a thirty year gap!

You could save enough money to provide yourself with an income to last until age 99, but that will be a waste of resources if you die earlier. On the other hand, you could save a smaller amount, but you would run out of money if you lived to 99. An annuity solves this problem. It provides income in a very precise amount by taking from those who die early to pay those who die later. Thus, it provides you with an income for the rest of your life and stops only upon your death.

Someone once expressed it this way: with life insurance you bet against yourself (your longevity) -- if you die soon you (really your beneficiaries) win the bet; if you live long you lose. With annuities, you bet in favor of yourself (your longevity) -- if you die soon, you lose the bet. If you live long, you win. Thus, the phrase "annuitants live longer," either to get the next check, or due to their superior health because they worry less.



You will notice that under the basic idea, when you die after receiving all that income, there is nothing left for your beneficiaries. For example, say you give an insurance company $100,000 for an annuity that pays $10,000/year, and you die at the end of one year. You will have spent 100K and received only 10K. This is a pure annuity.

Insurance companies have various alternative arrangements, called by the awkward phrase "Period Certain." For example, with a 20-year Period Certain, the company will pay the benefit to you for your life, or your surviving beneficiaries if you die during the next 20 years, and then stop. However, in that case, instead of receiving the $10,000/year in the earlier example, you'll receive a lesser amount, like $8,000/year.

Most annuities sold today are a deferred annuity. In this case, you put money into a contract and it grows without tax -- the taxes are deferred until you take the money out. At that time you can simply take a withdrawal, or you can annuitize it, which means converting it into either a pure annuity or a period certain annuity.

Here you begin to receive an income stream immediately, either as a pure annuity or period certain.

This is a somewhat newer product and I think it is very intriguing. A major problem we face as we plan retirement is that we will outlive the resources. Another way of saying this is that we live too long. This product is pure insurance against living too long. For example, you buy this when you are 65, and it begins paying for the rest of your life when you are 85.

This is a type of DIA, introduced in 2014, with a specific tax advantage. As you know, you must take distributions from your IRAs and qualified plans at age 70 1/2, and pay taxes on them. This is often undesirable for folks who may not need or want the income at age 70. This is especially true today when more and more people work into their seventies. With a QLAC, the IRS will allow you to defer up to 125K or 25% of the account, into a DIA. So instead of paying taxes on income unnecessarily, you defer the income until you need it, for example, at age 85. This is a new and potentially exciting development in the retirement income planning field.

I hope this helps!

• Unlike CDs fixed annuities are not insured by the FDIC.
• Some fixed annuities come with high guaranteed interest rates that can decrease after a set number of years to a much lower minimum interest rate determined by law.
• The principal guarantee and income for life guarantee features of fixed annuities are subject to the claims-paying ability of the issuing insurance company.
• If you take an early distribution from an annuity you may be subject to a surrender charge which could result in a loss of principal. You may also be subject to a tax penalty if you make a withdrawal before age 59 1/2.

Immediate Annuities I	Immediate Annuities II
Deferred Income Annuities	Excellent summary of strategies for retirement income
QLACs I	QLACs II
Annuities amid stock volatility (see article's item 4)	On trends in retirement
Why women need to save more	When to cut the financial cord
Jane Bryant Quinn on preserving your nest egg	On not saving for retirement