Which Annuity Type is BEST For Your Retirement Income?
If you are looking for annuity income for a free and easy retirement, there are lots of options to consider. Of course there are multiple products from multiple companies but there are also different types of contracts that all have an advantage depending on the situation or personal preference of the person buying it. Unfortunately, most advisors specialize in one type of the other so you may not always be getting what’s best. It takes a true professional to explain all the options and perform an exhaustive search of the entire market to find what’s best for you. I have always explained every option to those interested so it’s time I put this on the record for anyone who wants to learn a little more.
Every type of contract has its advantages and it can seem kind of confusing. After 20 years I am well versed in all varieties and know how to analyze all to deliver the most benefit. At times it seems as though more acronyms exist here than in the US Military so I’ll do my best to unwind all the abbreviations and make it into something that is more useful to you.
SPIA – Single Premium Immediate Annuity
This is the traditional form of annuity income. Give the insurance company some money and in return receive monthly payments for the rest of your life. If you are taking income within one year of purchase, this is most likely the highest payment you will receive and typically with a very strong insurance company. If you need income deferred for more than one year then this option is not available.
DIA – Deferred Income Annuity
Nothing more than a SPIA that can be deferred for more than a year, a deferred income annuity offers income enhancements during the deferral period but otherwise the same structure as a single premium immediate annuity. These became popular as qualified longevity annuity contracts(QLACS) because people could defer RMDs for a portion of their IRA assets and in return receive a late-life income stream.
GLWB – Guaranteed Lifetime Withdrawal Benefit
This is an additional benefit that can be added to a deferred annuity that offers guaranteed lifetime income. Mostly available on fixed indexed and variable annuities, GLWBs are most likely to pay the highest amounts of income if payments are deferred for more than one year. These became popular because of the residual cash value that exists in the contract. That way contract owners didn’t feel like they were just giving money away.
It makes sense to chase the contract that offers the most income for your situation. I can confidently say that I’ve got damn near 100% success rate in selling only the best solution for any income need. And I’ve used every single one of these options. It’s different for everyone and each needs to be considered if maximizing income is the goal. Personal preference is certainly a big factor but there are several objective reasons why one or the other may be the best for you.
Maximum Income
If you are taking income within one year then it’s most likely that the single premium immediate annuity (SPIA) will be the best. Deferred for a year or more, income will be the highest from a fixed indexed annuity and guaranteed lifetime withdrawal benefit. Variable annuities have GLWBs as well but don’t have as high of guarantee because of the variable account value. Deferred income annuities (DIAs) are a close comparison for deferred income and are also the first choice of many investment institutions but I recently ran a quote for a GLWB that paid about 15% more income than the DIA. Check out a podcast from not too long ago that covers this in detail. Podcast from January 26, 2024: Fidelity’s Annuity Recommendation
Beneficiaries
Leaving money behind offsets the need for maximum income. Payments favoring one side will take value from the other side. If you want to leave something behind then you need to accept less payment. If you don’t want to leave anything behind then you get the most payment. SPIAs in the purest form leave no remainder to heirs and DIAs are essentially the same thing. Remainders have to be added and this reduces the income payment. Remainder options include secondary guarantees for income payments or even refund of the balance of the principal. It can be customized to be whatever you want. In comparison, GLWBs come from the account value. The account grows and is reduced by the income taken. If anything is left, that amount is paid to your heirs. If leaving an inheritance is important then this can have a significant impact on your decision as to which contract is best.
Taxes
It’s a big part of retirement so everyone will consider this. If you buy an annuity with qualified retirement funds from an IRA then every penny of distributions is fully taxable as ordinary income. Taxation only makes a difference if you buy any of the above with non-qualified or after-tax money. When that’s the case you’ll find big differences. All non-qualified annuities are taxed on a last-in-first-out basis, meaning that interest earnings are pulled first and taxed as ordinary income. Any distribution from the initial purchase has already been taxed so you can get it back tax-free. SPIAs and DIAs will have an exclusion ratio which states the amount of each payment that is taxable. This is preferred by those who like to know what to expect. GLWBs on the other hand, would have interest earnings in the contract that need to be distributed first. If deferred for a while, the payments might be taxable until you start dipping into the principal which would be tax-free. I’ll give you an example in the podcast so check that out if you need more verification.
Required Minimum Distributions
Not many people fully understand this point but it makes a big difference with your annuity choice and is something material that may steer you toward one product or the other. DIAs can remove some money from the RMD calculation but only up to a limit. SPIAs create their own RMD calculation so you usually have to make additional distributions elsewhere. GLWBs come as part of an additional account so can be used to offset distributions from other IRAs. Lots of people have trouble understanding this but it’s a real issue. If you put half of your IRA into a SPIA then you still have to take an RMD from the other half of the IRA when the time comes. If you put half of it into a GLWB then the higher payments will reduce the required distribution from the other half. Lots of people have a hard time wrapping their head around this so let me know if you all want me to dig into this one.
Nine out of ten people are simply looking for maximum income. If that’s the case then it only depends on your specific parameters to define the best deal. You have to look at all the options available. When contingencies come into play something other than maximum income might be the best option. If you want to make sure you get the best for your situation then I’m not sure who else you should call.
Podcast Episode: Which Annuity Type is Best Your Your Retirement?
Download the episode “Which Annuity Type is Best Your Your Retirement?” on Apple Music
Last Updated on May 10, 2024 by Bryan Anderson
There’s no mention of MYGA’s. Is there no roll for this type of annuity here?
MYGAs can play a role but that’s a strategy rather than a specific product. All MYGAs have annuity options that can be compared to the SPIAs or DIAs in this example but that’s not the primary purpose or best use of a MYGA.