The Hard Times Guide to Retirement Security: Practical Strategies for Money, Work, and Living

Chapter 5. Income Annuities Another Way to Get a Guarantee

Let's say you won't have a defined benefit (DB) pension, or you expect a small pension that won't pay much. One option is to create a do-it-yourself pension. This is better known as an income annuity.

An income annuity is something like the mirror opposite of life insurance. A life insurance policy protects you and your family from the possibility you'll die prematurely; an income annuity insures you against the risk that you might outlive your assets.

The annuity market includes an almost dizzying array of products, but our main focus here will be on income annuities. The proposition is fairly simple: You make a payment to an insurance company, which in turn promises to send you a regular check starting on a specific date. In most cases, the payments continue so long as you live.

Income annuities aren't very popular as financial tools for retirement; private annuities represent only about 2 percent of total household income for current retirees.^[35] People seem to have an overwhelming urge to take lump-sum payments over an income-annuity stream. When employer-sponsored retirement plans offer the choice of a lifetime annuity or a lump-sum payment, most employees choose the lump sum.^[36] Estate and inheritance concerns are another reason income annuities haven't gained a lot of traction, because payments end when you die. Another problem holding back the annuity market is a lack of transparency. There's no widely accepted third-party ...