Need Income Until Social Security Kicks In? Consider an Income Annuity With a Time Limit
Period certain income annuities come in handy in other situations, too, and they provide high guaranteed income.

Period certain income annuities have set income terms, making them useful for helping to fund early retirement or prefund a loan or large life insurance policy.
Immediate income annuities with a lifetime payout are popular for a good reason. By providing immediate monthly income that’s guaranteed for life, they help assure a worry-free retirement.
But you don’t have to choose the lifetime option. Instead, you may want to choose a set income term, from five to 20 years. Sometimes it makes perfect sense to choose a period certain income annuity.

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For instance, you may need extra income to fund early retirement until Social Security and/or a company pension kicks in. Or you may wish to delay taking Social Security until age 70 to max out your income benefits. Or you may want to prefund a loan or large life insurance policy that requires installments over a fixed period of time.
Period certain income annuities provide high guaranteed income
An immediate annuity is bought with a lump sum, which is why it’s called a single premium immediate annuity (SPIA). Whether lifetime or period certain, it usually has no cash surrender value after purchase. You’ve turned over your money to an insurance company in exchange for a stream of guaranteed income.
With a lifetime income SPIA, an optional cash-refund feature guarantees that your premium payment will not be lost in the event of early death. If you die before your monthly income payments equal the full amount of your annuity purchase price, your beneficiary will receive the difference.
You may also opt to add your spouse, so he or she will continue to receive income after your death, assuming you predecease him or her. This option typically lowers your payments slightly.
With a period certain annuity, depending on your age at issue and payment term selected, you’ll usually get larger monthly payments than with a lifetime variety because the insurance is guaranteeing income for a set period, not for your life. The shorter the period, the greater the annual or monthly income.
You’ll get a much higher guaranteed income than from other alternatives. Part of the reason is that with a period certain annuity, if nonqualified, most of the income you will receive is a tax-free return of your principal, and the rest is taxable interest. (When the annuity is held in a qualified retirement plan such as a traditional IRA or a 401(k), payments are fully taxable.) Bank certificates of deposit, for instance, don’t provide a similar amount of income because you can take out only interest unless you’re willing to pay a significant penalty to the bank. Otherwise, you must wait till maturity to get your principal back.
The other reason annuities produce more income is that they usually pay substantially higher underlying interest rates than bond funds, CDs and money market accounts.
Furthermore, you don’t get similar guarantees. Money market rates fluctuate; bond-fund prices vary.
Let’s look at some possible uses.
Income for early retirement
For instance, suppose you want to retire now but delay taking Social Security for eight years. You could buy an eight-year period certain annuity to fill your income gap.
Here’s an example. Joe, age 60, retires and invests $200,000 in an eight-year period certain immediate annuity and lists his wife as joint annuitant so that she will be protected and continue to receive any remaining payments if he dies before the eight years are up. With this type of annuity, he can accurately calculate his annual return.
Joe will receive $2,471.21 per month, including $2,083.33 in return of principal and $387.88 of taxable interest. After eight years, he’ll start collecting Social Security and won’t need the additional income.
Prefunding installment payments for a big life insurance policy or loan
Suppose you decide to purchase a large life insurance policy. Rather than funding the policy with a single premium payment, you could buy a 10-year period certain annuity with annual payments you’ll use to make the premium payments over time. That way, you can avoid the life policy being categorized as a modified endowment contract (MEC), which can be disadvantageous from a tax perspective.
Or let’s say you have a substantial loan that has a prepayment penalty. Rather than paying off the loan and taking the prepayment hit, you could purchase a period certain annuity to prefund the remaining payments.
Yoking immediate and deferred annuities for better after-tax income
Here’s an interesting income strategy that combines two types of annuities.
Let’s say you have $100,000 to deposit and that your combined federal/state income tax bracket is 28%. How can you maximize your guaranteed after-tax income?
You could simply buy a 10-year fixed-rate annuity yielding 5.20%. A fixed-rate annuity acts much like a bank CD: You deposit a lump sum, and the insurer agrees to pay a set guaranteed rate of interest for the term.
You could then take annual interest withdrawals of $5,200. These withdrawals are fully taxable, resulting in $1,456 in additional taxes, giving you a net after-tax income of $3,744.
Here’s an alternative. Instead, you’d place $60,234 in the fixed-rate annuity and the balance, $39,766, in a 10-year period certain immediate annuity paying annual income of $5,010. Of that amount, $1,032 is taxable and $3,978 is nontaxable
The $60,234 allocated to the fixed-rate annuity grows tax-deferred so that it will equal your original $100,000 at the end of 10 years.
At first glance, it would appear that putting all the money in a fixed-rate annuity generates more income than the split-annuity strategy. However, with the split strategy, only $1,032 of the annual income payment is taxable because the rest of the payment is a return of your premium deposit. As a result, only $289 in annual taxes are owed, leaving net after-tax income of $4,721, which is $977 more than if you placed all the money in a fixed-rate annuity.
In retirement, most people rely on a combination of Social Security, retirement plans and personal savings for income. A split-annuity strategy can help supplement those sources, add stability and help ensure that you don’t outlive your assets.
The vast majority of immediate annuities bought include some type of lifetime payout configuration. But they’re not the only good income solution. Consider your situation and talk to an experienced annuity adviser. You may find that a period certain annuity fills the bill.
Related Content
- Three Ways to Get Future Lifetime Income with Annuities
- Life Insurance: Let’s Separate the Facts From Fiction
- Looking for the Best Rate on a Fixed Annuity? Shopping Around Really Pays Off
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Retirement-income expert Ken Nuss is the founder and CEO of AnnuityAdvantage, a leading online provider of fixed-rate, fixed-indexed and immediate-income annuities. Interest rates from dozens of insurers are constantly updated on its website. He launched the AnnuityAdvantage website in 1999 to help people looking for their best options in principal-protected annuities. More information is available from the Medford, Ore., based company at www.annuityadvantage.com or (800) 239-0356.
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