Jimmy Carter recently became the first president to reach 100 years old. Fortunately, he’s had no worries about running out of money. His net worth is estimated at $10 million, and his presidential pension is $246,424 in 2024. Nice work if you can get it!
Though few people live to 100, an ever-increasing number are living past 90. Out of all past presidents, just six have lived past ninety, but four were recent (Ford, Reagan, George H.W. Bush and Carter). Joe Biden, who will be 82 in November, is now the tenth longest-lived president.
While a 65-year-old has a not-insignificant 22% chance of living to 90, if both spouses are 65 there’s a 47% likelihood one partner will, and a 20 percent chance that one will live past age 95. Both Carters passed that mark; Rosalynn died last year at 96.
Those are current projections. With new drugs and medical treatments coming on board all the time, it’s likely more Americans beat longevity odds in the future.
If you expect an unusually generous guaranteed pension and high-end Social Security benefits and also have long-term care insurance, you may not have to be too concerned about becoming impoverished if you live to a very old age. Most people, however, need to save a lot for retirement and carefully select the best vehicles to ensure that their income will be there for many decades.
The place to start is by socking away money in an employer-sponsored qualified retirement plan, such as a 401(k) or similar plan. Additionally, a standard IRA, if you’re eligible, can cut current taxes and provide tax deferral. A Roth IRA (income limits apply) is particularly powerful because future withdrawals are tax-free in perpetuity.
Tax-deferred annuities: a powerful supplemental way to turbocharge nonqualified savings
But anyone planning for retirement must also make good choices on what to do with their nonqualified money. This encompasses all your savings and investments that aren’t held in a tax-qualified plan. They can include savings accounts, brokerage accounts, real estate, life insurance and nonqualified annuities.
Annuities are one of the very few ways to get tax deferral on your nonqualified savings. The government has bestowed that advantage on annuities for about 100 years to give people a way to build up retirement savings faster and make those savings last during retirement. (Tax-deferred annuities predate IRAs by decades.) With an annuity, you can defer taxation until you receive money from one.
Annuities are typically designed to throw off reliable income sooner or later, depending on your preferences and needs. This is crucial in retirement when you will need a steady income to replace your earnings.
What kind of annuities?
I work only with guaranteed fixed annuities of various types, so I won’t cover variable annuities, which are investment-oriented and come with more risk, greater potential upside and fewer guarantees. They can be worthwhile, but I believe guaranteed fixed annuities are a better choice for most people most of the time.
Guaranteed fixed annuities can be placed in two major categories. One type, the deferred annuity, has cash value and produces interest earnings that you may take in withdrawals or let accumulate in the annuity to grow your tax-deferred savings. These include fixed-rate annuities (which resemble bank certificates of deposit) and fixed indexed annuities.
In contrast, income annuities typically have no cash surrender value. With an income annuity, you pay a premium deposit to the insurance company in exchange for immediate income (an immediate annuity) or future income (deferred income annuity or DIA). You’re essentially creating your own personal pension.
You can buy an annuity that guarantees income for a set period, such as 20 years, but the lifetime-income option is by far the most popular. Having an income you can’t outlive is a terrific advantage should you or your spouse live to a Carteresque old age. If you’re married, you can choose a joint lifetime option that keeps paying as long as one spouse is living, and the statistics show the odds of at least one partner living a very long time are high.
Most people choose any of the above types for their nonqualified savings because of the power of tax deferral. If you buy a DIA and choose to start getting income payments 15 years from now, you shelter that money from income taxes for 15 years.
Similarly, fixed-rate annuities (also known as MYGAs or multi-year guaranteed annuities) and fixed indexed annuities also defer taxes on nonqualified savings until interest earnings are withdrawn. Compounding interest is even more powerful when you don’t have to give up a chunk to taxes.
Let’s say you put $25,000 into a 10-year MYGA yielding 5.45% paid annually. At the end of the term, you’d have $42,501.66, which you can use to buy another annuity if you want to maintain tax deferral.
Now let’s look at buying a 10-year taxable hypothetical bank CD paying the same 5.45% annual rate for the sake of comparison. (In early October 2024, the top 10-year CD paid 3.85% APY, according to Investopedia.) If you’re in the 27% marginal tax bracket (22% federal plus 5% state), you’d earn 3.98% after deducting for taxes each year, and after 10 years you’d have a lot less: $36,935.00. And the longer you keep your money tax-deferred, the greater the difference.
Look before you leap
Annuities have lots of advantages, but any buyer should be aware of their key features. And while the different types of annuities differ a lot, they have some things in common.
First of all, you’re committing your money for a multi-year period. If you withdraw money from a fixed-rate or fixed-indexed annuity during the surrender period beyond the allowed withdrawals, you’ll be hit with a penalty charge.
You may not be allowed to withdraw any money at all from a deferred income annuity. However, if payments haven’t started you may be able to change the date when you’ll start getting monthly payments. Getting payments sooner would decrease the monthly amount; delaying them would increase them.
Any interest you receive from an annuity before age 59½ is typically subject to a 10% IRS penalty plus regular income tax.
Second, unlike bank CDs or savings deposits, annuities are not insured by the FDIC or another US government agency. That’s why it’s important to choose wisely and select a financially strong insurance company. However, state guaranty associations provide a backup safety net for annuity holders. Coverage varies by state.
Annuities of all types are worth investigating today. Thanks to today’s higher interest rates, all types are even more attractive than they were a few years ago.
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Ken Nuss is the founder and CEO of AnnuityAdvantage, a leading online provider of fixed-rate, fixed-indexed, and lifetime income annuities. Ken is a nationally recognized annuity expert and widely published author. A free rate comparison service with interest rates from dozens of insurers is available at https://www.annuityadvantage.com or by calling (800) 239-0356.