No matter how much cash you've saved, you may be concerned about running out of money in retirement. That concern is not without foundation because, based on current life expectancies, it's possible you may live into your late 70s.
If you have a pension, the risk of winding up penniless is less than if you have no such monthly income following retirement. But according to U.S. Bureau of Labor Statistics estimates, only 3 percent of industry workers have a defined benefit retirement plan.
The company-sponsored 401(k) and IRA are popular choices for those who must fund their own retirements. So, even when we put hammer to nail and build our own nest egg, we must figure out not only how to turn that money into a stream of income to fund our golden years, but we must also identify vehicles, such as an annuity, to protect those assets from creditors and lawsuits.
Funding An Annuity
Depending on the statutes of the state in which you live, an annuity is one way to do that. When you place a portion of your savings into an annuity, you contract with an insurance company to provide an income stream in your retirement. In exchange, you receive payments at certain intervals.
Types of Annuities
The word "annuity" refers to many different kinds of products, including an immediate annuity and the fixed annuity. While one annuity may resemble a certificate of deposit, another embraces tax-deferred growth and still another looks like a pension.
The basic annuity types are:
Variable Annuity: This annuity invests your money in mutual funds or a pool of managed investments. You benefit if the market rises, but the reverse is also true. With this annuity, you pay fees and are at risk of losing your principal in a down market.
Fixed Annuity: This annuity doesn't charge fees and it will pay you a guaranteed rate of return, such as 5 percent a year.
Fixed-Index Annuity: This annuity grants you market exposure but your principal is not subject to risk. In essence, it's a fixed annuity with a variable rate of return based on a market index, such as the Standard & Poor’s 500-stock index.
It's best to do some research and eliminate the confusion before you buy an annuity. But the primary purpose of an annuity is tax deferral and to provide a guaranteed lifetime income.
Avoidance of Lawsuit Risk
Because annuities mirror a pension's benefits, they are helpful to retirees who need money to live on. But retirees should do what they need to do to protect their annuities from risk. In some states, including Texas and Florida, an annuity provides asset and creditor protection.
Read More: Annuity Due Vs. Ordinary Annuity
Asset and Creditor Statutorial Protection
Some states have statutes that protect annuities from lawsuits and creditor actions. Consulting an attorney is the only sure way to determine if your state offers insurance or benefit plan protections. But Texas and Florida, in particular, may protect your annuity from being garnished if you're sued due to a negligent act, such as breaking a law that results in a deadly car accident.
Texas Annuity Protection
According to the Texas Insurance Code, insurance and annuity benefits "inure exclusively to the benefit of the person for whose use and benefit the insurance or annuity is designated in the policy or contract; and
(2) are fully exempt from: (A) garnishment, attachment, execution, or other seizure; (B) seizure, appropriation, or application by any legal or equitable process or by operation of law to pay a debt or other liability of an insured or of a beneficiary, either before or after the benefits are provided; and (C) a demand in a bankruptcy proceeding of the insured or beneficiary."
Read More: Are Annuities Protected from Creditors?
An Annuity's Major Disadvantage
Because annuities aren't liquid, you should limit the percentage of your financial portfolio you invest in them. For instance, if you place $100,000 in an annuity, you may receive income for the remainder of your life, but you can't get that money back to cover an emergency. You'll need to have an emergency fund to cover the myriad unexpected events that can happen.
When evaluating the value of an annuity, you should consider whether you need an income higher than what your other investments may generate. Also, consider if an annuity may be of critical benefit to you when you retire, namely, if you'll need a constant stream of payments for the rest of your life. In addition, be aware that some annuities are a means to participate in the market and still others may protect the retiree's principal from lawsuits.
- U.S. Bureau of Labor Statistics: 67 percent of private industry workers had access to retirement plans in 2020
- Online Sunshine:"Method of Setting Apart Homestead and Exemptions
- Kiplinger: Protecting Retirement Accounts from Creditors
- Texas.gov: Insurance Code
- MedicineNet: What Is the Life Expectancy Today?
- Nationwide: How Do Annuities Work?
Billie Nordmeyer is an IT consultant of 25 years standing. As a senior technical consultant for SAP America and Deloitte Touche DRT Systems, a business analyst, senior staff, and independent consultant, Billie has worked across the retail, oil and gas, pharmaceutical, aeronautics and banking industries. Billie holds a BSBA accounting, MBA finance, MA international management as well as the Business Analyst and Software Project Management certificates from the Cockrell School of Engineering at the University of Texas at Austin.