Income for life
An annuity can pay you income for as long as you live, however long that is. That promise has a price: fees, less access to your money, or both. Here is how it works and what it costs.
Why lifetime income matters to some people
Nobody knows how long they will live. If you spend down savings too quickly, you can run out. If you spend too cautiously, you may go without things you could have afforded. Lifetime income moves part of that uncertainty to an insurance company. In exchange, you give up some control over the money.
Before any annuity, look at the lifetime income you may already have. Social Security pays for life and adjusts for inflation, and waiting to claim generally raises your monthly benefit. A pension may pay for life too. For some people, those are enough. The income gap estimator helps you see where you stand.
Two ways an annuity creates lifetime income
1. Turning the annuity into payments (annuitizing)
Annuitizing means handing the value of an annuity to the insurer in exchange for a stream of payments. An immediate annuity starts paying within a year of purchase. A deferred income annuity starts paying at a future date you pick.
The tradeoffs first:
- The decision is usually permanent. Once payments start, you generally cannot get the lump sum back.
- With a pure life-only payout, payments stop when you die, even if that is soon after they start.
- You can add a guarantee period or a refund feature so heirs receive something if you die early. Each one lowers the monthly payment.
- Unless you choose an increasing payment, which starts lower, the amount stays the same while prices rise.
What you get: a simple, predictable payment for life, or for two lives if you choose a joint payout for you and a spouse.
2. An income rider on a deferred annuity
A rider is an optional feature added to a contract. An income rider, sometimes called a guaranteed lifetime withdrawal benefit, lets you take a set amount each year for life while the annuity stays yours. The annuity's value keeps being credited interest, and you can still reach it, subject to the contract's rules.
The tradeoffs first:
- Rider fees. Most income riders charge an annual fee, a percentage taken from your annuity's value each year. The fee comes out even in years when you are credited zero interest, so it can shrink your value.
- The income base is not your money. Riders calculate your income from a number called the income base or benefit base. It is a bookkeeping figure only. You cannot withdraw it as a lump sum, and it is not what your heirs receive.
- Roll-ups apply only to the income base. Some riders increase the income base by a set percentage each year before income starts. That increase is not interest on your money. An agent who quotes a roll-up percentage as if it were a return is misleading you.
- Taking too much can cut your income. Withdrawals above the rider's allowed amount usually reduce the income base, and so your future income, sometimes by more than the amount withdrawn.
- Surrender charges still apply. The rider does not shorten the surrender period.
What you get: if your annuity's value runs out because of withdrawals, fees and years of low interest, the insurer keeps paying the rider income for the rest of your life, or both lives on a joint rider. When you die, your beneficiaries receive whatever value is left in the annuity, if any.
Comparing the two in plain terms
| Question | Annuitizing | Income rider |
|---|---|---|
| Can I reach the money later? | Generally no, once payments start. | Yes, but withdrawals above the allowed amount reduce future income and may trigger surrender charges. |
| Is there an ongoing fee? | No separate fee. The cost is built into the payment amount. | Usually yes, an annual rider fee. |
| What do heirs receive? | Nothing on life-only. Something if you add a guarantee period or refund feature. | Any value left in the annuity. |
| Can I change my mind? | Generally no. | You can stop taking income or surrender the contract, subject to its charges. |
Who lifetime income can fit, and who it doesn't
It can fit if your steady income does not cover your essential bills, you are in reasonable health, you worry about outliving your savings, and you will still have accessible money after buying it.
It often doesn't fit if Social Security and a pension already cover your essentials, your health suggests a shorter-than-average life expectancy, you need flexible access to most of your money, or leaving the largest possible amount to heirs is your top goal.
Read more on when an annuity is not right.
Questions to ask any agent
- What is the annual rider fee, what is it calculated on, and can it go up?
- Is the income figure you showed me guaranteed, or does it depend on interest that is not guaranteed?
- What is the difference between the income base and the value I can actually withdraw?
- What happens to my income if I take out more than the allowed amount one year?
- What do my beneficiaries get if I die in year two? In year fifteen?
- Is the income for my life only, or for my spouse's life too? What does adding a spouse change?
- Will the income ever increase with inflation?
- What do you earn if I buy this, including for the rider?
We answer each of these in writing, with the guaranteed figures shown separately from anything that is not guaranteed.
Questions are free.
Book a 20-minute conversation, or send us a question by email. No cost, no obligation, and we never sell your information.