Although there are several flavors of annuities, the term "retirement annuity" typically refers to an annuity taken from an employer pension plan (e.g. monthly payments for life) or a non-qualified annuity purchased by an investor with after tax funds in return for monthly payments from an insurance company. Retirement annuity rates or monthly payments will depend on the amount you invest, your age and the term you select for payments (you can generally select payments over 5 years or lifetime). If you select lifetime payments, both you and the insurance company share risk on your life expectancy. If you get hit by a bus and killed tomorrow, payments stop, they keep all your money and they win. If you live to age 110, you get a great retirement annuity rate and they will be sorry to have you as a client they must pay for life.
A retirement annuity provides dependable security--think of it like another social security check but likely better. While the Social Security system is upside down (has more payments due than it will have assets), commercial insurance companies invest and preserve your money to pay your claim.
To purchase a retirement annuity from an insurance company, you make a one-time payment and distributions typically begin within a month. A retirement annuity can be fixed or variable--your payment can be the same every month, you can opt for smaller payments in the beginning that grow over time (i.e. inflation adjusted) or you can have your payments based on a menu of investment options and you take the risk of how well the investments perform. In the case of the variable annuity, retirement annuity rates cannot be forecasted although some annuity companies will provide a minimum guaranteed rate of return.
In the case of he income payments you receive from a "fixed" retirement annuity, these will never change and are based on the amount you deposit, the age when you start and the interest rate environment at the time of purchase.
You can check retirement annuity rates with the immediate annuity calculator. For an even more current quotation, ask your retirement consultant to get quotes from a number of insurance companies.
Note that the quotes you receive will show the monthly payment you get. You will likely not see any interest rate on these quotes because the total payments to you may be unknown in the case of a life annuity, i.e. no one knows how much you will receive. But if you died at your life expectancy, you could calculate the retirement annuity rate and get an internal rate of return about 2%. You may be surprised why anyone would buy a retirement annuity at such a low rate. It's because of the security involved--no matter how long you live, you cannot outlive the funds on a lifetime retirement annuity. The insurance company takes a substantial risk and provides a relatively low rate when priced to life expectancy.
If you are age 70 or above, you will likely not find a source of cash flow larger or safer than what you can obtain from the retirement annuity, with the comfort of knowing your payments are quite secure from a AAA rated insurance company. Even though the retirement annuity rate may be low (because your principal is never recovered), the monthly payments cannot be matched by an alternative with the same degree of safety.
Additionally, under current tax law, a portion of each payment received from a retirement annuity is tax-free until your total premium is recovered. The remainder of each payment is taxed as ordinary income in the year received.
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