No Holes In This Strategy

Jun 16, 2021

Although it may not be as popular as National Doughnut Day (June 4), June is Annuity Awareness Month. And just like doughnuts, annuities come in many varieties.

An immediate annuity turns premiums into a series of income payments from an insurance company that begin within a year after a consumer buys it. A deferred annuity allows savings to grow tax-deferred until payouts begin. And there are different types of deferred annuities (fixed, index, or variable annuities) that let savers decide how their money grows. Longevity annuities help insure against the risk of outliving one’s assets later in life by paying out a stream of income starting a decade or more after retirement begins.

One common feature among all types of annuities is the guarantee of predictable income. Given the decline of traditional, defined-benefit pension plans that offer monthly retirement checks, an annuity can play a similar role in a retirement for those with IRAs, 401(k)s or similar plans.

Many savers use annuities to supplement Social Security – providing a second source of steady, guaranteed monthly lifetime income to cover expenses. Annuities can also plan an important role as a bridge between retirement and claiming Social Security. 

An individual’s monthly Social Security benefit amount depends on when they claim their benefits. If benefits begin before normal retirement age (usually 67), retirees will receive a reduced benefit, up to 30 percent, from the monthly benefit at normal retirement age. Delaying the receipt of benefits to age 70 results in higher monthly payments. 

One retirement strategy retirees may want to consider is to purchase an annuity for income at retirement, but delay claiming Social Security. If a person retires early, she could purchase a fixed term annuity to provide a source of guaranteed monthly income from the time she retires to when she plans to claim Social Security, for example at normal retirement age or later – thereby maximizing her monthly Social Security benefits. 

Happy National Annuity Awareness Month. And for the record, I’m all for doughnuts getting an entire month instead of just one day.

(To learn more about annuities, join ACLI’s Twitter chat on Monday, June 28 from 1-2 p.m. ET. #SecureRetirement2021)

Howard Bard

Howard Bard is Vice President, Taxes and Retirement Security at the American Council of Life Insurers (ACLI). Howard helps guide ACLI policy on regulation and legislation affecting the retirement security business of its members. He has more than 20 years of experience in the practice of employee benefits law.