Annuities Incomes

Annuities. Retirees with a significant amount of savings can use some or all of it to purchase an annuity, a financial product sold by insurance companies that pays out income for life. Only about 6 percent of households owned individual annuities in 2007 and just 3 percent were fixed immediate annuities – products designed only to provide lifetime income, according to the Federal Reserve.

Annuities offering lifetime income generally provide retirees with more income than they would receive from conservative investments, such as bonds, GAO found. For example, a $100,000 annuity purchase in April 2010 might provide $6,480 per year as long as the purchaser or their spouse is alive. That income is 25 percent higher than the $5,200 of income that would be generated by a highly rated $100,000 30-year corporate bond. However, in the case of the bond investment, the principal amount of the bond would still be available in 30 years or to pay for a large unplanned expense. The original value of the annuity would generally not be available to the purchaser again without penalty.

Few annuities provide payments adjusted for inflation, which could mean that retirees will have less purchasing power each year. And annuities generally leave nothing for heirs. Also, many retirees haven’t saved enough to buy an annuity that would replace more than a small fraction of their preretirement income. Some annuities offer options that address some of these concerns in exchange for lower monthly payments or increased costs. For example, some annuities come with limited death benefits in exchange for lower monthly payments or provide some protection against inflation with the caveat of lower initial payments.