Studies show that when people plan for the future, they tend to underestimate the amount of time they’ll live in retirement. So while saving enough for retirement is critical, it’s also a good idea to plan how you’ll turn those savings into “income” throughout your retirement.
Converting part of your retirement savings to an annuity may be a good start to your income plan. An annuity is a unique investment product available from banks, brokerage firms, or insurance companies that can help you save for retirement, generate a “paycheck” in retirement, or both.
When you purchase an annuity, you pay a lump-sum premium or make a series of premium payments to the annuity provider in exchange for payments to you throughout your lifetime. Depending on your needs, payments may begin in retirement or sooner. You may have a choice in the frequency of the payments you receive, but it’s typically monthly. The amount of the annuity payments you receive depends on how much you pay into the annuity and the type of annuity you have chosen.
Types of annuities
Generally, annuities fall into two categories: deferred and income (also called immediate).
Within these two categories, annuities can be fixed or variable, which affects the amount of interest that’s paid:
- A fixed annuity provides you with a fixed payment every month for the rest of your life. Your annuity payment does not change over time.
- A variable annuity allows for further growth potential after you begin drawing income from your annuity. Your return—and your monthly payment—vary based on investment performance.1
Your premiums aren’t tax-deductible, but taxes on interest and other investment gains are generally deferred until you receive them.2 Because premiums aren’t tax-deductible, you may want to maximize your pre-tax contributions to your Hewlett Packard Enterprise 401(k) Plan and any IRAs before saving with a deferred annuity.
| Deferred annuity | Income (or immediate) annuity | |
|---|---|---|
| Purpose | Deferred annuities let you save more now for retirement—beyond the Hewlett Packard Enterprise 401(k) Plan and any IRAs or personal savings you may have. Unlike a 401(k) or IRA, there are no limits on the amounts you can contribute. | Income annuities provide you with an immediate stream of income—helping to reduce the risk that you’ll outlive your savings. The annuity provider takes on this risk in exchange for a “mortality charge,” which is built into the price you pay for the annuity. |
| Premiums | You pay a series of premiums. | You pay a one-time, lump-sum premium. |
| Payments | Payments to you begin at a date you select in the future, such as when you retire. This type of annuity also provides a death benefit, which guarantees your beneficiary the principal and the investment earnings associated with your premiums. | Payments to you begin immediately after purchase and usually last for the rest of your life. However, you may be able to purchase an income annuity that will provide continued payments to your heirs after your death. |
| Annuity growth | Within these two categories, annuities can be fixed or variable, which affects the amount of interest that's paid:
| |
| Tax implications | Your premiums aren’t tax-deductible, but taxes on interest and other investment gains are generally deferred until you receive them.2 Because premiums aren't tax-deductible, you may want to maximize your pre-tax contributions to your Hewlett Packard Enterprise 401(k) Plan and any IRAs before saving with a deferred annuity. | |
| Important notes | You may pay a high commission to the agent who sells the annuity, and fees for deferred annuities can be significantly greater than fees for investing on your own through mutual funds and other investments. | Once you purchase an income annuity, you can’t recover your lump-sum payment without a significant penalty, except through the regular payments. You should be comfortable tying up a portion of your nest egg if you purchase an income annuity and weigh that against the possibility that you’ll need to access a large amount of money for unexpected expenses in the future. |
Annuities and your retirement income plan
If you’re interested in using an income annuity to provide a “paycheck” in retirement, you’ll want to be sure to avoid putting too much of your savings in that vehicle. Some experts say that, generally, you should allocate no more than 30% to 50% of your savings to income annuities to provide some guaranteed income3 in retirement, while allocating the remainder of your retirement assets to other investments that may allow for greater growth and flexibility. Before deciding to purchase an annuity, it’s a good idea to talk to a financial planner to determine a retirement savings and income strategy that’s right for you.
For help determining how much income you may have or need in retirement and estimated expenses, use your financial wellness dashboard on NetBenefits®. While you’re there, check out the other resources and articles that can help you prepare financially for retirement.
1 Principal value and investment returns of a variable annuity will fluctuate and you may have a gain or loss when money is withdrawn.
2 Any earnings and gains for post-tax contributions will be taxed as ordinary income.
3 Guarantees are subject to the claims-paying ability of the issuing insurance company.
This information is intended to be educational and is not tailored to the investment needs of any specific investor.
Keep in mind, investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money.
IMPORTANT: The projections or other information generated by the Financial Wellness Dashboard's Retirement Analysis regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. Your results may vary with each use and over time.
An annuity is a contract issued by an insurance company and purchased by a consumer for long-term investing. An annuity is not a mutual fund. There are various fees and expenses associated with annuities and, in certain situations, withdrawal penalties may be applicable.
Fidelity does not provide legal or tax advice and the information provided above is general in nature and should not be considered legal or tax advice. Consult with an attorney or tax professional regarding your specific legal or tax situation.
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