What are Guaranteed Return Annuities?

By design, annuities can help you secure a foundational base of retirement income that you cannot outlive through a feature unique to annuities, guaranteed payments. These payments are guaranteed by the insurance company that issues the product. Annuities are the only financial product that can guarantee a monthly stream of income in retirement.

As you assemble the pieces of your retirement income plan, it is important to take into consideration the concepts of growth and stability.

While investment accounts can be the growth engine in retirement, it is important to have a portion of your retirement income that is stable and guaranteed. Until recently, many people depended on pension income to provide that guarantee of monthly income. Unfortunately, most employers have discontinued traditional pensions in favor of 401k and 403b plans.

This means that most people will bear the burden of providing a source of guaranteed income themselves.

That's where guaranteed return annuities come in. A guaranteed income annuity can replace the traditional pension and only requires proper funding to create an important base of income for life.

How Do Guaranteed Return Annuities Work?

Annuities are products issued by insurance companies that are designed to help you accumulate money prior to retirement (the accumulation phase funded with deferred annuities). Then they distribute money to you in retirement (the distribution or payout phase funded by income annuities).

There are many types of annuities depending on your goals and risk tolerance.

Income annuities (or guaranteed income annuities) allow you to choose to receive a flow of income for life or for a period of time of your choosing. Like a pension, you can also choose to have all or part of the guaranteed payments to continue to your spouse after you pass. This reduces the monthly payment amount but provides peace of mind for your spouse.

With guaranteed rate annuities, the annuity provider places your money in mostly conservative investments and promises to pay a monthly amount that will not change for the period of time you choose.

Here are the typical payout scenarios for guaranteed income annuities:

Single Life or Life Only

Single Life Annuities (also known as life-only annuities) provide the highest payout, but only for your lifetime. When you die, the payments stop. These are best for unmarried people and those who expect to live a long time!

Life Annuity with Period Certain

Life annuities with period certain let you choose to receive monthly payouts for life but hedge your bet by adding a period of time that the insurance company will guarantee monthly annuity payments even if you die during the guarantee period. This income would pass to a beneficiary when you die.

Let's say you had a lifetime annuity with a 10-year annuity period. The insurance company promises to pay out for the rest of your life, but no less than 10 years.

Joint and Survivor Annuity

The joint and survivor annuity (or joint life annuity) option pays money for the duration of two people's lives.

If you pass away first, your spouse will continue receiving payments for the rest of his or her life as a survivor benefit. If they pass away first, you will keep receiving an income stream for life. The payments are reduced vs a single life option.

Benefits of Choosing a Guaranteed Return Annuity

Guaranteed return annuities offer several benefits, making them a valuable financial tool if you want a guaranteed and predictable component to your retirement savings and income plan.

Here are some of the key benefits of buying a guaranteed return annuity:

1. Predictable income: An income annuity provides a steady stream of income for life, ensuring that you won't outlive your savings. This can help with budgeting and planning for future expenses.
2. Protection Against Market Volatility: Income annuities are not subject to market fluctuations, making them a reliable source of income even during economic downturns.
3. No Investment Decisions: Annuities eliminate the need for ongoing investment decisions. Once purchased, they provide automatic income without the need to manage investments.
4. Customizable Payout Options: Annuities can be structured to meet individual needs, allowing for single-life or joint-life payouts, with or without period-certain guarantees.
5. Creditor Protection: In many cases, annuity payments are protected from creditors, providing added security for your retirement income.
6. No Contribution Limits: Unlike retirement accounts like IRAs and 401(k)s, there are no contribution limits on the amount you can invest in an annuity, allowing for larger sums to be converted into guaranteed income.
7. Peace of Mind: Knowing that you have a source of income that cannot be depleted can provide peace of mind and reduce financial stress during retirement.

Considerations Before Purchasing

Annuities may not be good for everyone. Here are some possible limitations to consider before purchasing a guaranteed rate annuity:

1. Lack of Liquidity: Once you purchase a guaranteed rate annuity, you typically cannot access the principal in a lump sum. Your funds are converted into a stream of income, and you may have limited or no access to the original investment.
2. Limited Flexibility: Income annuities are inflexible, and you can't make changes to the payout terms or the amount of income once the annuity is in force. This lack of flexibility can be a drawback if your financial needs change over time.
3. Inflation Risk: Most annuities do not adjust for inflation, meaning the purchasing power of your fixed payments may erode over time due to rising living costs. Some companies offer an inflation-adjusted option, which typically offers lower initial payouts.
4. Fees and Expenses: Annuities can come with various fees, including surrender charges, administrative costs, and management fees for variable annuities. These fees can reduce your overall returns.
5. Long-Term Commitment: Annuities are long-term financial products. If you need access to your entire investment for emergencies or other needs, an annuity may not be suitable.
6. Tax Implications: The taxation of annuity income can be complex. Earnings in annuities may be subject to ordinary income tax, and withdrawals before age 59½ can incur penalties.
7. Credit Risk: The guarantees of an income annuity are only as strong as the financial stability of the insurance company that issues it. It's important to choose a financially sound insurer.

Because of these possible limitations, it is important to consult with a licensed agent or financial advisor to discuss your unique needs and financial situation.

Ask Yourself These Questions Before Committing to a Guaranteed Rate Annuity

If you meet with an agent or advisor to discuss how a guaranteed rate annuity might fit into your retirement plan, here are some key questions you may want to ask:

How long does the guaranteed rate last?

This one is crucial because the length of time of the guarantees should be customized for your unique needs based on variables such as health, marriage status, and the availability of other, more liquid money.

Are there any penalties for early withdrawal?

Annuities can come with fees and charges that could possibly eat into your returns. Make sure you discuss these charges, if any, with your advisor.

How does this annuity fit into my broader retirement strategy?

Think of guaranteed rate annuities as a piece of a larger retirement planning puzzle. Does it fit? What role will it play? For most people, a guaranteed rate annuity is used to pay everyday expenses, including utilities, taxes, and healthcare costs. These are critical expenses in retirement and should be covered with payments that are guaranteed to show up in your checking account every month.

Final Thoughts

Annuity products have been around for a long time. And for good reason.

They are the only financial product that can provide guaranteed income that you cannot outlive. Guaranteed rate annuities can play an important role in your retirement plan and act as a solid foundation upon which you can build a comfortable retirement.

Annuity products from Canvas provide fixed returns that are some of the most competitive in the country.

A fixed annuity from Canvas can be the launching pad for a lifetime of guaranteed income. And Canvas allows you to apply to purchase an annuity on your own or with the help of a licensed agent.