For most Americans, pensions have become a thing of the past, and we're now more reliant on ourselves for our future security than ever. One solid way to create an income stream for yourself in retirement is to buy an annuity. Still, it's reasonable to wonder, "How safe is my annuity?" The answer is pretty safe -- if you follow a few guidelines.

Intro to annuities

An annuity is basically a contract. You generally pay an insurer or a financial services company a sum of money (often a hefty sum) and in exchange for that, the company will commit to sending you regular payments immediately or in the future for the duration of the contract. Many contracts offer payments until the end of your life -- or, if you want, until both you and your spouse have died.

It's not quite so simple, though, as there are many different kinds of annuities, with some much more problematic than others. Here are the main kinds: immediate vs. deferred (paying you immediately vs. starting at some point when you're older), fixed vs. variable (certain payouts vs. payouts tied to the performance of the market or part of the market), and lifetime vs. fixed period (paying until death or paying for a certain span of time). For many, if not most, people, a fixed annuity, whether immediate or deferred, is the best choice.

What are the upsides of an annuity?

Obviously, the main point and the main benefit of an annuity is income. How much can you expect to receive? Well, for $200,000, a 70-year-old couple might get around $1,000 per month via an immediate fixed annuity for as long as at least one of them is alive. A 70-year-old woman who spends $100,000 may get about $577 per month (that's around $6,900 per year), vs. $641 for a 70-year-old man (about $7,700 per year). Women will usually receive less because they tend to live longer than men.

That kind of income can help keep you from running out of money in retirement and it can help you sleep better at night. Keep in mind, too, that as we age, we often become less interested in and less able to make sound financial decisions. An annuity takes away much responsibility, letting a retiree just sit back and collect annuity checks each month.

Annuities can also serve you well if you're worried about running out of money later in life, as your nest egg gets depleted. Remember that fixed annuities can start immediately or can be deferred. If you think you have sufficient income for about 20 years, you might buy a deferred annuity today that will start paying you in 15 or so years. That way, you'll be assured of income later in life, too. Better still, you'll get bigger payouts if they're deferred, because the insurance company gets your money early and can invest it for itself until it has to pay you. A 70-year-old woman who spends $100,000 on a deferred fixed annuity that will start paying when she turns 80 can expect around $1,450 per month. That's quite a bit more than the $577 she would get immediately because the insurance company can invest the premium for a few years and will be paying for fewer years, too (on average).

Consider, too, that fixed annuity income takes stock market risk out of the equation: If the market tanks, you're not likely to see any interruption in your payments. An annuity is "safer" than stocks in that regard.



Favor highly rated annuity providers

Annuity income is not 100% guaranteed. The financial company you've contracted with does promise to pay you according to the terms of the contract, but that promise is only as reliable as the company that sells it. Thus, seek out the best-rated insurers and financial services companies and perhaps divide your purchase money between a few of them. For example, if you were going to spend $300,000 on annuities, you might buy a $100,000 contract from three different highly rated insurers. Be sure you understand what credit ratings mean, too. For example, a rating of "A" from Standard & Poor's, Moody's, or Fitch, is good, but it's not the best possible rating -- which would be AAA or Aaa. Also, note that states often have guaranty associations that provide at least some financial recovery in the event of an insurer's failure.

Avoid pushy salespeople

There are lots of people out there trying to sell annuities, and some of them engage in misconduct. A recent study examined the records of more than a million financial advisors and former financial advisors between 2005 and 2015 and found that 7% of them (that's about 87,000 people!) had been disciplined for misconduct or fraud. The top complaints were unsuitable advice (21.3%), misrepresentation (17.7%), unauthorized activity (15.1%), omission of key facts (11.6%), fees/commissions (8.7%), and fraud (7.9%), and the specific products involved in the most misconduct were insurance (13.8%), annuities (8.6%), stocks (6%), and mutual funds (4.6%). You're not likely to experience trouble, but it's good to be careful. For starters, find out whether your advisor is held to the "fiduciary" standard, which requires offering advice that is in the client's best interest. Non-fiduciaries can get away with simply offering suitable recommendations that may earn them bigger commissions than better recommendations would. You can also just skip the salesperson and contact a trusted insurer on your own. You brokerage might even offer annuities.

Consider prevailing interest rates

Annuities will tend to offer smaller payments when prevailing interest rates are low. Since our current interest rates are near historic lows, it can be worth delaying buying until rates rise -- if you can. (The Fed recently hiked rates a bit, and it's very possible, but not certain, that we'll see further increases in the coming years.) To deal with the current low-interest rate environment, you might consider using the "laddering" strategy, where you divide your total planned annuity purchase into chunks and buy installments over time. For example, you'd buy a third of the annuity income you want now, and another third in a few years when rates are likely to be higher, and the last third even later.

Buy the best kind of annuity for yourself

Finally, learn more about annuities and buy whatever makes the most sense for you. If you're willing to pay a little more or receive a little less, for example, you might have your payouts adjusted for inflation. Also, if you're married, you can pay more and get a joint fixed annuity that pays until both you and your spouse have passed away. That can be smarter than each of you buying a single life policy. Two single policies might offer more income while you're both alive, but a lot less when one dies. For $200,000, a 70-year-old couple might get around $1,000 per month via an immediate fixed annuity for as long as at least one of them is alive. A 70-year-old woman who spends $100,000 may get about $577 per month, vs. $641 for a 70-year-old man. (Women will usually receive less because they tend to live longer than men.)

As you plan for your retirement, it's smart to at least consider a fixed annuity. Don't leave your retirement up to chance or up to Social Security. The average Social Security benefit, after all, was recently $1,350 per month, or about $16,000 per year. (The maximum benefit for those retiring at their full retirement age was recently $2,639 -- or about $32,000 for the whole year.) If you don't expect to receive enough Social Security income to fully support you in retirement, you'll need to be planning for other income streams.

The $16,122 Social Security bonus most retirees completely overlook 
If you're like most Americans..... 

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