Income Annuities: The Guaranteed Stream Of Income In Retirement
May 13, 2020 by Wade Pfau
For those seeking to spend more in retirement than the bond yield curve can support, the alternative to seeking risk premium through an aggressive asset allocation is to pool risk through insurance. Income annuities are the simplest type of insurance products which trade a lump-sum payment for protected lifetime income. The ability to convert a portion of assets (as it is not an all-or-nothing decision) into a guaranteed income stream is a fundamental retirement income tool which contrasts with an investment portfolio in terms of the advantages and disadvantages for managing retirement risks.
We start our discussion of annuities with the income annuity because it is the most straightforward and easy-to-understand way to convert a pot of money into a guaranteed stream of spending for life. This chapter focuses specifically on income annuities, also known as immediate annuities, single-premium immediate annuities (SPIAs), deferred income annuities (DIAs), or longevity insurance. The next chapters will expand the discussion to include other types of more complex annuities that are also able to offer lifetime income protections.