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It depends on what you mean by "Annuity"

The formal definition of an "Annuity" is a stream of payments made to you over your lifetime or a guaranteed period, where each payment amount is identical (although there may be an inflation adjustment each year) and the interval between each payment is constant. Thus an annuity can be paid by an insurance company (most common), or a long term sales contract, an income trust, a pension or structured settlement, to name a few.

But as a carryover from the 1950/60s, insurance companies used to contract with school districts to have teachers defer part of their salary each month into a tax deferred savings plan as defined under the new Sec. 403(b), with a mandatory conversion to a life annuity at some predetermined retirement age. These were referred to as deferred annuities, as that's what they really were. This got shortened to just an 'annuity', a title which the insurance industry seemed to like as it is still used today when describing these tax favored savings accounts, although sometimes the insurance industry will add "tax sheltered" or "tax favored" or some other attractive sounding marketing term before the word "Annuity". Today, I don't think anyone still has a mandatory annuity conversion feature on their 403(b) what an insurance company continues to stubbornly refer to as an "Annuity" is really an EXPENSIVE tax deferred savings account.

Assuming you are referring to the former, a life annuity can be had with any number of bells and whistles added to it by the insurance company, with the most popular being a percent (usually 50% or 100%) spousal benefit should you die first, a guaranteed payment period such as the first 10 years the annuity will pay the benefit even if you die during that period (called a "period certain"), a guaranteed "Death Benefit" that will pay to your beneficiary at your death a fixed or declining % of the original amount paid for the life annuity, an annual inflation adjuster (there are many ways this is defined), and so forth. The important thing to remember about these bells-n-whistles is you will pay for each one through a reduced if you take the reduction to each monthly payment for adding, say, a "death benefit" rider, multiply that difference by 12 and then by the number of years left in your life expectancy and that's the cost to you for adding it. The insurance company often speaks about these add-ons as though they're throwing them in for free. Always remember and never forget....the insurance industry gives away NOTHING FOR pay for it whether you know it or not.

If the latter, Fahgettaboudit! The advantage to tax deferred savings is the number of years you have to compound tax deferred growth...that is not what you're trying to do as you begin retirement.


1. Guaranteed payments for life plus any length of time you/surviving spouse (if you choose that extra) live.
2. You don't have to deal with the worst enemy for most who self-direct their own investments: themselves. The tendency an untrained and inexperienced self-investor has as they begin retirement is doing EXACTLY what they should NOT be doing: buying more when the market is at new highs or selling when the market has sold off and everybody feels like jumping off the nearest cliff. Holding an insurance product for income will prevent you from doing this.
3. Easy. Pay-it and Forget-it.

1. Expensive. Annuities are a costly way to generate reliable retirement years income. Employing the right asset allocation and having the discipline to stick with it regardless of what the market is doing, will provide a much better life income than a life annuity.
2. No inflation adjustment, thus purchasing power will decline year after year. Adding an inflation option to a life annuity is one of the most expensive add-ons. Depending on your age, it will reduce the benefit of a single life annuity by 25% to adding this option will instantly reduce purchasing power.
3. You've lost the purchase price of the annuity. So if you pay the insurer $100,000 for a life annuity benefit of $400 per month and then die the next month, the full $100,000 will be lost, unless you've added one of the bells-n-whistles I spoke of earlier.
4. Inflexibility. Once you start it, you're poured in concrete. There are add-ons that allow you to access a % of the principal at some points along the way, but again, this will reduce the monthly benefit. But for most, once you start, that's what you'll have for the rest of your life.
5. Insurance company default. This is rare, but it has happened. So you're better to stick with the big name insurers with at least an A rating from A.M. Best. Each state requires an independent guaranty fund that provides insurance to holders of certain fixed insurance products should the insurer default, but this will usually mean a reduction in benefit should the insurer fail...but as I said, this is rare.

Hope that helps

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