What’s a retirement annuity?

When planning for retirement, you will need to consider how much retirement income you will need and your lifespan. If you have not saved enough money to last you through your retirement years, you should explore alternative savings options to help you meet your retirement goals. One of these options is a retirement annuity, which promises a guaranteed income for retirees over their lifetime.

A retirement annuity is a type of annuity product that allows you to pay a lump sum or series of payments in exchange for monthly, quarterly, or annual income in retirement. Once you purchase an annuity, you can choose to receive immediate payouts or deferred payouts. If you choose an immediate payout, you will start receiving payments in less than a year, while a deferred annuity delays payments until a later point in the future when you retire.

How a retirement annuity works 

A retirement annuity is a type of annuity contract between yourself and an insurance company. When you purchase a retirement annuity, you pay a premium to the insurer, either as a lump sum or regular payments, and in return, you receive a guaranteed series of payments in retirement. Depending on the type of retirement annuity you buy, the premium grows at a fixed or variable rate over the years.

All types of retirement annuities provide some form of guarantee. The main benefit you receive is the recurring payments over your lifetime, which can help you meet your retirement expenses. However, you must wait until the surrender period expires to start receiving payments. If you withdraw money during the surrender period, you will pay a surrender charge.

Types of retirement annuities

Several types of annuities are available for retirement, including:

Fixed annuity

The terms of a fixed annuity can vary- some annuities may grow at a guaranteed rate of return for a specific number of years, while some annuities may pay a guaranteed rate of return for the life of the annuity. A fixed annuity can be a good option for retirees looking to earn a stable income in retirement.

Variable annuity

A variable annuity earns a return based on the performance of an investment. These investments are known as sub-accounts and may include stocks, bonds, and mutual funds. The returns you get depend on how well the investments perform. If the market performs well, you can expect to earn a good return, whereas poor market performance can result in reduced returns.

Fixed-indexed annuity

A fixed-indexed annuity is tied to a market index. It pays a guaranteed minimum return, and there is a limit on the amount of losses you can incur. When the index performs well, you can potentially earn higher returns; if the index performs poorly, the annuity will retain its value and the losses will be capped

Immediate annuity

Immediate annuities pay out an income immediately after the annuity is purchased, usually in less than one year. They are ideal for individuals who have suddenly retired or lost income due to a layoff or disability and want an immediate source of income.  

Deferred annuity

A deferred annuity delays payments until a future date, usually in retirement. This annuity allows annuity owners to pay a lump sum or regular payments spread over time. Once you retire, you can make a one-off withdrawal or opt to receive monthly payouts for the rest of your life.

How can you use retirement annuity income?

When you receive retirement annuity income, you can use it for several purposes depending on your retirement needs. One of these uses is to cover fixed expenses such as rent, utilities, and mortgage payments. With Social Security checks being hardly enough to cover these bills, retirement annuity payments can help pay the excess costs that other incomes do not cover.

You can also use the retirement annuity income to pay for your retirement goals. If you have your fixed expenses covered by other retirement incomes, you can use the annuity income to fund your travels, pursue your hobbies, or learn a new skill.

Additionally, adding a new retirement income can help you manage your spending habits better by building a retirement budget. You can create a budget for all your retirement goals and needs based on your income from retirement annuity, Social Security benefits, retirement accounts, etc.

What’s a 403b annuity?

A 403(b) annuity is a retirement plan that is provided to employees of public schools, colleges, universities, and 501(c)(3) organizations. It is similar to a 401(k) plan, only that it is designed for public and non-profit institutions.

A 403(b) tax-sheltered annuity allows employees to make pre-tax contributions to the retirement plan, and they won't owe income taxes on the contributions until they make a withdrawal. Employers can also make matching contributions to the plan, but they must adhere to Employee Retirement Income Security Act (ERISA).

For 2023, employees can contribute up to $22,500 to a 403(b) plan. Employees who are age 50 or older can make 403(b) catch-up contributions of $7,500 in 2023. The combined employer and employee contributions should not exceed $66,000 in the same period.

403(b) Withdrawal Rules

When you retire, you can start making withdrawals from your 403(b) plan. The withdrawals will be taxed as regular income at the federal level. If your state imposes income taxes on retirement income, you will pay an additional state income tax. 

Generally, you must be at least age 59 ½ to withdraw money from your 403(b) account. If you are younger than age 59 ½, you will pay a 10% early withdrawal penalty, in addition to the regular income taxes.  

You can also choose to annuitize your 403(b) plan when you retire. This means that you will receive periodic payouts that guarantee an income stream for the rest of your life. You can annuitize the full 403(b) balance or part of it. When you die, the 403(b) balance will be distributed to your beneficiaries.