Picking the right income annuity

By: Dennis Ho

If you’ve read our previous article, you know that we (and many experts in the retirement space) are fans of income annuities. They are one of the few ways to generate guaranteed income for life and an important asset to consider for any retirement portfolio. But once you’ve decided to invest in an income annuity, how do you select the right one? To get to the answer, consider the following four questions:

· When should my income start?

· How much should I invest?

· Should I purchase a QLAC?

· Should I add a guarantee period?

When should my income to start?

Your income start date should match your goals. For most people, income annuities are used to replace some of their income once they stop working, which naturally leads to a start date on or around retirement. If you’ve already retired, you might choose an immediate annuity with a start date in the next few months. If you’re a few years from retirement, you might instead purchase a deferred income annuity with a start date around your expected retirement date. For example, a 55-year old might purchase a deferred income annuity with payments starting at age 65.

Another common goal for income annuities is to provide protection for the future. Imagine a 65-year-old woman who’s just retired. While about half of the women her age will pass away before age 89, 1-in-4 will live to age 95 or older. She might take some of her retirement assets and invest in a deferred annuity that starts in 20 years. This guarantees that no matter what happens in the markets or how she spends her other assets, there is a monthly paycheck waiting for her once she reaches age 85.

There are other potential uses for income annuities, but they are generally variations on the above themes. If you can clarify your goals, the ideal income start date should follow naturally.

How much should I invest?

It’s important to look at this from two perspectives — how much can you afford to invest and how much income do you need? Income annuities should only be one part of a diversified portfolio, so we typically recommend investing no more than 30% of your assets. That means if you have a $250,000 portfolio, invest no more than $75,000 in income annuities. From a need perspective, income annuities are best used to cover critical expenses in retirement, such as housing, food, and health care. One way to determine how much income you need is to add up all your critical expenses and subtract out your other sources of guaranteed income (e.g. social security and pensions). This difference is your “income gap” and is the monthly income you can target covering with an annuity. For example, if you have $4,000 in monthly critical expenses and $2,500 in guaranteed income, you could target an income annuity paying $1,500 per month. By adding the annuity, you’ll know that no matter how long you live or what happens in the markets, you’ll always have enough income each month to cover your critical expenses.

Should I purchase a QLAC?

A qualified longevity annuity contract (QLAC) is a special designation for certain deferred income annuities. If you purchase a deferred income annuity with IRA assets and meet certain requirements at the time of purchase, then you can classify the annuity a QLAC and the IRS allows you to exclude the investment from your required minimum distributions (RMDs). This allows you to keep a greater portion of your IRA assets growing tax-deferred, providing you with more income in your future years. Currently, the main requirements are that the annuity purchased be no more than $130,000 or 25% of your retirement assets and that payments start no later than age 85. You would also want income to start after age 70 ½, which is when RMDs start. Assuming an annuity with these parameters meets your goals, you should strongly consider designating your purchase a QLAC. If interested, you can read more about QLACs here.

Should I purchase a return of premium benefit?

While annuities are mainly purchased by people who worry about living too long, some buyers are also concerned with the risk of buying an annuity then passing away unexpectedly after just a few months of payments. To address this concern, you can include a guaranteed return of premium benefit, which ensures you’ll at least get your money back. With this benefit, if you pass away early, monthly payments will continue going to your beneficiaries until the total payments received by you and them at least equals your initial investment. The downside is you’ll receive a lower income check while alive if you elect this benefit. If you’re in your 50s, adding this benefit might only decrease your income 5–10%, but if you’re older, it could reduce it much more. We generally recommend against including this benefit so you can maximize your income while alive, but if this is an important concern, then go ahead and get quotes with and without return of premium and choose what makes you most comfortable.

After going through the above questions, you’ll have a good sense for the annuity that you want to purchase and be able to shop with confidence. Because annuity payments could continue for 30 years or more, make sure to stick with large, well-known insurers that have strong financial strength ratings and at least 80 or 90 years of history. Also, once you’ve narrowed down the insurers you’re interested in, don’t be shy about requesting multiple quotes. Prices can differ by 10% or more across insurers, so shopping around will help you find the best price for your annuity. When you’re ready, you can get instant online quotes from multiple insurers through Saturday.


Schedule a free call with a friendly annuity expert at Saturday. We can answer your retirement questions and help you decide if income annuities are a fit for you.

Saturday Insurance Services, LLC (“Saturday” or “Saturday Insurance”) is a licensed, digital insurance advisor. All tools, quotes, and information provided by Saturday are for educational purposes only and based on the limited information, if any, provided by you. We urge you to consult with your financial and tax advisors before making any purchase decisions. All quotes and estimates are non-binding and are not to be construed as a guarantee you will be able to purchase insurance. Availability of insurance and final pricing is determined solely by our insurer partners and subject to their review and acceptance of a completed application. All product guarantees are subject to the claims-paying ability of your insurer.