FEDweek

Keeping the Cash Flowing with Annuities

With people living longer and, in many cases, retiring earlier, a retirement fund might have to last for many decades. There’s a chance that you might run out of money, or at least run dangerously low, during an extended retirement.

If that’s a concern, one possible answer is to buy an immediate annuity, which can pay you a lifetime income, no matter how long you live. For a married couple, an immediate annuity can last as long as either spouse is still alive.

Many people think an “annuity” is a deferred annuity. In this type of annuity, you pay premiums and let any earnings build up, untaxed. Eventually, you can tap a deferred annuity and pay the tax.

Instead of a deferred annuity, you can buy an immediate annuity. With an immediate annuity, there is no investment buildup. You give a sizable lump-sum to a financial institution and you get a stream of cash flow, starting right away. This is one of the options in the TSP program.

When you buy an immediate annuity outside of a tax-deferred retirement account, your payments will be partly taxable and partly untaxed. The financial firm will calculate how much of each payment is a tax-free return of your investment and issue a report you can use to pay the tax.