Annuities 1: Buying a Paycheck for Life

The story: A paycheck Ruth can buy

Ruth, who has no pension, learns how an income annuity can turn part of Ruth’s savings into a check for life.

1. Narrator: Ruth has no pension. Social Security covers most of Ruth’s basics, but not all of them.
2. Ruth: I keep hearing about annuities. Some sound simple. Some sound like sales pitches.
3. Narrator: The simplest kind is an income annuity. You pay an insurer once, and it pays you a check for life, like a pension you buy.
4. Narrator: It works by pooling. Buyers who die early help pay those who live long. That’s the insurance.
5. Ruth: So if I live to 100, the insurer keeps paying. If I don’t, my share stays in the pool.
6. Narrator: Payouts depend on your age and on interest rates, so shop several insurers, and check how strong each one is.
7. Narrator: An income annuity is a pension you buy. Shop for it like insurance.

What you’ll learn

1. Immediate or deferred

   An immediate annuity starts paying now. A deferred income annuity starts paying later, say at 80 or 85 (example), and pays more per dollar because you wait. This lesson matters most for people without a pension, but anyone can use the ideas.

2. Pooling is the insurance

   The insurer pools many buyers. Those who die early leave money that helps pay those who live long. That pooling bonus, called mortality credits, is why an annuity can pay more each month than you could safely draw from the same savings yourself.

3. Inflation protection costs up front

   Most annuities pay a fixed amount, which buys less over time. Some offer a set yearly raise, like 2% (example), that doesn’t track real prices. Payouts tied to actual prices (CPI) are rare. Any raise means a lower first check.

4. Shop, and check the insurer

   Payouts vary by insurer, age and interest rates, so get several quotes. Check each insurer’s financial strength rating. State guaranty associations back annuities if an insurer fails, but only up to limits, so some people split money between insurers.

Key words

immediate annuity

pay once, get income now

Also called: single premium immediate annuity (SPIA)

deferred income annuity

pay now, get income later

Also called: DIA

mortality credits

the pooling bonus

CPI-linked

rises with actual prices

Common questions

Someone is pushing me to buy an annuity today. Is that normal?

Pressure to sign today is a warning sign. A good income annuity will still be there next week. Take time, compare quotes and ask someone who isn’t selling it.

What about indexed or variable annuities?

Those are different products with more moving parts and often higher fees. The next annuity lesson covers them and the questions to ask before you sign.

Remember this

An income annuity is a pension you buy. Shop for it like insurance.

Try it: Price a lifetime check

1. Decide how much monthly income, if any, you’d want to buy.
2. Get quotes from at least three insurers or an online quote tool.
3. Check each insurer’s strength rating and your state’s guaranty limit.

No account: use the public Retirement Calculator (/tools/retirement-calculator).

Live facts

Numbers that change over time, with when they were last checked and where they come from.

• State guaranty association limits

  Source: NOLHGA.com(opens in a new tab)

• Find your state insurance department

  Source: NAIC.org(opens in a new tab)

• Annuities: what to know before you buy

  Source: Investor.gov(opens in a new tab)