All About Annuities - Live Chats, Q&As: Free Advice on Retirement, Investing, Personal Finance -- Kiplinger

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All About Annuities

All of your annuity questions answered by Kiplinger's expert Kim Lankford.

  • I have an annutiy that already pays monthy for the rest of my life or my husbands if I go first. We have quite a large amount of money that was in investments, but the man in the bank convinced me that it would be better in an anuuity. I have a feeling I don't need two annuities, but need to put the money back in investments.
  • Thanks for your question. Even though annuities can be a great source of lifetime income, that's a good point that you don't want to invest too much money into an annuity because you usually can't access more than a certain amount of money every year -- whether you have an immediate annuity, which provides a fixed amount of money every year for life, or a deferred annuity with an income guarantee, which usually lets you withdraw a percentage of your guaranteed amount every year. It's important to keep other money in accounts that you can tap if you end up having an emergency or large expense, such as major medical expenses, that cost more than your annual payout. To calculate how much money to invest in an annuity, it's usually good to add up your regular expenses in retirement, subtract guaranteed sources of income (such as from Social Security and a pension) and consider buying an annuity that provides enough income to fill in the gap.
  • Great answer! Here's a question from Dan:
  • Are Annuities taxed as capital gains or interest gains?
  • Annuity payouts are taxed at income-tax rates, not capital-gains rates. The taxable amount of each payout varies based on the type of annuity and how you take the money. If the annuity is in an IRA or 401(k) from pre-tax money, then all payouts will be taxable. If you used after-tax money, however, then a portion of the payouts will be a tax-free return of your principal. If you have an immediate annuity, where you handed over the principal to the insurer in return for lifetime income, then a portion of every payout represents a return of your original investment and a portion is considered to be taxable earnings. If you have a deferred annuity and take withdrawals on your own, on the other hand, then your first withdrawals are considered to be from taxable earnings -- taxed at income-tax rates -- and then after you take out all of the interest and earnings, then the principal can be withdrawn without taxes. If you cash out the deferred annuity in a lump sum, then you'll have to pay income taxes on all of the earnings above your original investment.
  • Some of the biggest mistakes people make are when they start to withdraw the money from the annuity. If they have a variable annuity with guaranteed income benefits, then they need to be very careful when they start taking the money. Many of these annuities will base your guaranteed lifetime payouts on the highest level your investments have reached, even if they go down after that. So if you invested $100,000 in an annuity that lets you withdraw 6% of the highest value every year for life, and the investments increase to $130,000 then drop to $80,000, you'll be able to withdraw $7,800 per year for life -- 6% of the $130,000. But if you cash out the annuity, you'll only be able to get the $80,000 actual account value (and may have to pay a surrender charge, too). And if you keep the annuity but take out more than the $7,800, even in just one year, then the amount of income you're guaranteed in future years can drop significantly. The specific rules vary a lot by insurer -- see 7 Annuity Mistakes to Avoid column for some examples:
  • What are some interesting new developments in annuities that we should know about?
  • Here's another great piece from our archives on how to choose the right annuity for you:
  • One change is that the variable annuities with guaranteed income benefits now tend to offer smaller guarantees than they had in the past few years. Insurance companies that had been offering very generous income guarantees before 2008 ended up on the hook for a lot of money after the market downturn, so the new versions of their annuities tend to charge higher fees, restrict the investment choices (some now only let you invest in balanced funds) and reduced lifetime income payouts from about 6% of your guaranteed amount down to 5% per year. These annuities can still be a good deal if you want to lock in some guaranteed lifetime income while still investing the money in the market, but they're not quite as generous as the older versions -- which means you should be very careful before cashing out or switching out of an old annuity with valuable guarantees. It's also worthwhile to look into deferred fixed-income annuities, which were only introduced in the past few years. Unlike the variable annuities, you generally can't cash these out after you buy them, but you may be able to lock in a higher income guarantee than you'd have with a variable annuity, and they may have a death benefit so your heirs do get some money if you die before you start receiving the money. With so many Baby Boomers about to retire, there are a lot of new developments in annuities and many insurers have even more new products in the works.
  • Thank you for being with us today, Kim!
  • And, thank you to our sponsor MetLife.
  • This live chat is sponsored by MetLife and itsMetLife Shield Level SelectorSM annuity, a new product designed to give protection-minded clients more flexibility. It offers protection for a portion of their retirement assets, allows them to participate in growth opportunities and provides the ability to personalize their strategy. Learn more about the MetLife Shield Level Selector annuity and its features by clicking on any MetLife ad or by visiting
  • And, don't forget our monthly personal finance chats! Have your personal finance questions answered by NAPFA experts in our next chat, Thursday, July 18, from 1-3 p.m. EST.
  • Thank you everyone for your questions! And if you think of additional questions, you can always e-mail me at Thanks for participating!
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