Did your parents (or grandparents) receive a pension check that lasted their whole lives during retirement? Is a lifetime annuity a possible substitute for the pension check of previous generations?

In past generations, employees often worked for one company their whole career and received a pension check when they retired. This check came in the mail every month for as long as they lived. Along with Social Security, this was often a primary source of retirement income. Even if other savings ran out, the pension check and the Social Security continued to provide an income.

In today’s world, most of us do not have this type of “check for life” pension plan. We are saving into 401(k) plans at work and IRAs to build a retirement “nest egg,” and when we retire, we are in charge of paying ourselves from these accounts. Many people express the concern, “What if I live a long time like some of my relatives and I deplete my savings? Social Security is not enough to live on!”

Replacing a portion of your paycheck when retired is complex. As part of an overall retirement income plan, some retirees use a portion of their savings to purchase a lifetime annuity contract offered by an insurance company. The annuity provides regular income for the rest of their lives and if elected, can continue after their deaths to provide income for a survivor.  In essence, a lifetime annuity, coupled with Social Security, creates the security of an individual pension plan.

Retirees often ask, “How can an insurance company pay me no matter how long I live?” Actuaries know some people will die before life expectancy and some people will live a very long time. Some people live to 100 years of age and some pass away soon after retiring.  The checks paid to those who live to “old-old age” will be funded by those who pass early.  

So the benefit of lifetime annuity income is a steady check that does not run out before running out of life – much like a pension check.  The purchase of an annuity is generally irrevocable: i.e., you cannot change your mind and get your money back.  You can select to have payments continue until one individual passes or until both spouses have passed away. Also, note that payments are based on the claims paying ability of the insurance company, so the financial strength of the insurance company making the payments is important.

While there are many types of annuities, such as variable annuities or indexed annuities which can provide some investment return upside to an annuitant, the objective of a lifetime fixed annuity is to create a steady income that cannot be outlived.

When you are discussing your retirement income plan with a CFP® professional, consider if Lifetime Annuity Income makes sense as part of your strategy based on your unique personal situation, your health and likely longevity.

Lifetime annuity income, just like all income solutions, should be considered as part of an overall financial planning process. Start with a financial plan to create an integrated solution before considering any product or solution.