Four Steps To Consider When Selecting An Annuity

With life expectancies increasing, most people will need retirement income for a longer period of time than their parents or grandparents did. These days, it’s not uncommon for people to live 30 years or more in retirement.

A life annuity offers an effective way to fund this income. A life annuity is a contract through which an insurance company agrees to make regular payments to you (and your annuity partner, if you have one) for life, backed by the insurance company’s claims-paying ability. It helps relieve you from the worry of spending too much — or too little — of your savings.

Consider the potential advantages of using a life annuity to provide at least some of your income in retirement. Follow these steps to find out if an annuity is a good choice for you.

Step 1: Determine how an annuity can help you reach your retirement income goals.

A plan for receiving income in retirement should achieve three goals: lifetime income; inflation protection; and control over your savings (especially if you plan to leave a legacy to your heirs or to a favorite charity). Your plan should also be based on your financial circumstances and desired retirement lifestyle. To ensure you create an income plan that’s tailored to your situation, you’ll need to consider several factors. What will your anticipated expenses be in retirement? What will your income sources be for funding your retirement? Will other people depend on your income? How old are you (and, if applicable, what are the ages of your spouse or partner)? How is your health and that of your spouse or partner? Keep in mind that your income needs may change, particularly if your retirement years span several decades. Therefore, your retirement income plan should give you flexibility to meet changing circumstances.

Speak with a financial professional to evaluate your financial situation, and work on developing a plan that will help you reach the three goals listed above. You may find that you don’t have to select one income option and exclude all the others. For example, you may find that you can best meet your needs through a combination of different payment options, such as an annuity and regular withdrawals.

If your analysis reveals that an annuity is a good choice for some or all of your retirement savings, your next step is to determine which type of annuity best suits your needs.

Step 2: If an annuity is well-suited to your retirement goals, determine whether a fixed or variable annuity (or a combination of the two) is best for your circumstances.

The two primary types of annuities are fixed (or guaranteed) and variable. In fixed or guaranteed annuities, the funds are invested in the insurance company’s general account, which typically contains fixed-income securities like bonds. The issuer, not the contract owner, assumes all investment risk. Fixed annuities offer a guaranteed payment, with the payout amount based on the assumed future returns of the investments and the annuitant’s life expectancy. All guarantees are based upon the claims paying ability of the issuer. Variable annuities provide the contract owner with the ability to invest in both fixed-income and stock-based accounts whose values change depending on the performance of their underlying investments. While variable annuities offer the potential for higher long-term returns than fixed annuities, generally their payouts will fluctuate more dramatically from year to year. Unlike with a fixed annuity, the contract owner of a variable annuity assumes the investment risk.

Since fixed annuities offer a fixed return (often for a specified period of time) that is often less than the long-term return potential of other securities such as stocks and bonds, their payments may not keep pace with inflation. As a result, a fixed annuity might be best if you want to use its payments to cover basic expenses that are not likely to vary from year to year. If, however, you seek to offset the effects of inflation, adding a variable annuity can help.

Step 3: If you need to provide income for someone in addition to yourself, look into a two-life annuity.

If you are married, have a partner or have a relative or friend whom you need to help support, consider a joint or two-life annuity. A two-life annuity covers two people and pays benefits during the lives of both people.
If a two-life annuity is the best choice for your circumstances, you’ll need to select an appropriate option. Insurance companies offer different types of two-life annuities, with options including full or partial payments to a survivor even after the death of the annuity partner.

To ensure that you make the right decision, work with your financial professional to help you find out how much income the different annuity options will provide. Look closely at your accumulations/savings and expenses, and take into account the fact that the combined Social Security income of a married couple will decline automatically by as much as 33% after the death of a spouse.

Step 4: If you have any beneficiaries to whom you’d like to leave assets, consider a guaranteed period.

Typically, life annuities include what’s known as a guaranteed period, whereby you designate a beneficiary(s) who will receive annuity payments if you (and any annuity partner) die before the period ends. Then, at the end of the guaranteed period, payments to the beneficiary(s) stop. (Note that even after the guaranteed period ends, annuity payments will still continue to you and your annuity partner, if applicable.) Guaranteed periods cover different periods of time, such as 10, 15 or 20 years. Please note these guarantee periods are subject to restrictions.

Guaranteed periods can be a valuable option if you have children, grandchildren, other relatives or even a charity to who you would like to give money. For example, consider a married couple, both age 70, with two children to whom they are interested in leaving assets. Let’s say the couple takes a two-life annuity with a 20-year guaranteed period. If the husband dies at age 75 (five years into the 20-year guaranteed period) and the wife dies at age 77 (seven years into the guaranteed period), their children will receive income payments for the remaining 13 years of the guaranteed period.

Although guaranteed periods come with a price tag, the cost is generally minimal. For example, for a 60-year-old couple, the cost of a 20-year guaranteed period is about $2 each month per every $100,000 of annuity accumulations. Therefore, for most people, the guaranteed period is likely to be an option well worth having.

Do Some Smart Shopping

Fees, surrender charges, investment options and the performance track-record of the various annuities available in the market can vary significantly. Don’t pay more than necessary. Shop carefully for a low-cost annuity that has features which are tailored to your goals. And don’t overlook the financial strength of the insurance company issuing the annuity; look for a company with top ratings from the major insurance company rating agencies, which include A.M. Best Company, Standard & Poor’s, Moody’s Investors Service and Fitch.

To learn more about a particular annuity, read the annuity’s prospectus and other product literature or visit the website of the financial company that’s offering it. You can also learn more about annuities at TIAA-CREF or other retirement planning topics in our Learning Center. TIAA-CREF participants can meet with an advisor. Our advisors receive no commissions. They are compensated through a salary plus incentive program that focuses on client service excellence. Learn more here.

Annuities are designed for retirement and other long term goals. When you contribute to an annuity, your money must remain in it until you reach 59½. If you make a withdrawal before then, the money will be taxed as ordinary income and you may be subject to an additional 10% early withdrawal penalty and surrender charges may apply in the early years of some contracts. Furthermore, if you choose to invest in the variable investment products, your money will be subject to the risks inherent in investing in securities.

You should consider the investment objectives, risks, charges and expenses carefully before investing. Please call 877 518-9161, or view a current prospectus that contains this and other information. Please read the prospectus carefully before investing.

* Past performance cannot guarantee future results.

All annuity guarantees are based on the claims-paying ability of the issuer.

© 2014 and prior years, Teachers Insurance and Annuity Association - College Retirement Equities Fund (TIAA-CREF), New York, NY 10017