8 Surprising Ways to Prosper From Annuities

You can use a fixed annuity to do more than just generate retirement income. These insurance contracts can also help you give to charity, leave money to your heirs and delay taking Social Security.

A couple meets with a financial planner to discuss annuities.
(Image credit: Getty Images)

As financial tools go, fixed annuities are not particularly flashy. In exchange for a premium or a lump sum of cash, these insurance contracts earn a moderate fixed return, currently 1.5% to 3% a year, to deliver a steady, guaranteed income for the rest of your life and even that of a spouse or partner. "It's like having your own personal pension plan," says Sara Wiener, assistant vice president of annuities at Principal Financial Group in Des Moines, Iowa.

You can set up an immediate annuity with a lump sum deposit to collect income right away or pay a series of premiums, either monthly or annually, for a deferred annuity, which starts paying you at a future date. Once you begin drawing the income, you stop paying premiums.

Although some contracts can be set up for as little as $5,000, the more you pay into your fixed annuity, the higher your monthly income will be. For example, a 65-year-old man who buys a $250,000 fixed immediate annuity can get $1,252 a month for the rest of his life, according to Charles Schwab's fixed annuity calculator. To generate the same guaranteed lifetime income with a deferred annuity, a 55-year-old planning to retire in 10 years will need to contribute about $1,800 a month for a decade.

Annuities haven't always had the best reputation -- and with good reason. The fees and commissions an annuity issuer charges can be high. Once you turn over a lump sum, you lose control over the money. If you change your mind or need to tap the funds early, you'll pay a surrender charge, typically about 7% of the withdrawal amount, which declines about 1% a year before disappearing altogether. Because of their complexity and cost, annuities often require careful research and impartial advice from a financial professional who doesn't have a stake in selling you a contract.

Compared with indexed and variable annuities, which are more complex and potentially expensive, fixed annuities are simpler, pay a predictable return and generally have lower costs. They're also surprisingly versatile with uses that go beyond generating reliable retirement income. "Annuities today are much more consumer-friendly and multipurpose than in years past," Wiener says.

Depending on the setup, annuities can be used to pay for long-term care, simplify estate planning or help retirees manage their money better. Some fixed annuities are designed for a specific purpose, such as donating to charity, while others can be used to reduce required minimum distributions from a traditional retirement savings account.

David Rodeck
Contributing Writer, Kiplinger's Retirement Report