Income Annuities

SOCIAL SECURITY, WITH its guaranteed stream of inflation-indexed income, is arguably the best income annuity available. This is why you should give serious thought to delaying Social Security, so you get the largest possible check.

Even if you delay benefits, you may want more lifetime income. That’s where income annuities come in. Annuities have a reputation for being costly, complicated products pushed by aggressive salespeople. A January 2015 survey by TIAA found that just 28% of Americans had a favorable impression of annuities. But not all annuities are a bad investment. There are four types you might consider:

Immediate fixed annuities. These can provide a check every month for life, though—unlike Social Security—that annuity check usually doesn’t increase with inflation.

Charitable gift annuities. These are similar to immediate fixed annuities, except you buy from your favorite charity, not an insurance company. The downside: Charitable gift annuities typically pay less income. The upside: If you die early in retirement, your favorite charity stands to benefit, rather than an insurance company. Charitable gift annuities, along with charitable remainder trusts, are discussed in the chapter devoted to estate planning.

Longevity insurance. Also known as a deferred income annuity, this provides lifetime income starting at a future date, thus addressing the financial risk of living a surprisingly long time.

Variable annuities that generate income. These are complicated products that offer the chance to generate lifetime income, while still investing for long-run growth. Some allow you to add a so-called living benefits rider, while others can be converted into immediate variable annuities.

Our Humble Opinion: Retirees are often reluctant to buy income annuities, just as they’re reluctant to delay Social Security. We think this is a mistake. Delaying Social Security and buying income annuities can be the key to a more comfortable, less financially stressful retirement. Both strategies make particular sense for those looking to squeeze maximum income out of their savings. Thinking of buying an income annuity from an insurance company? We’d suggest focusing on longevity insurance and plain-vanilla immediate fixed annuities.

Next: Pooling Risk

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