Download the Schwab app from iTunes®Get the AppClose

Using Fixed Indexed Annuities for Lifetime Income

Annuities can be a helpful tool for managing your savings in retirement. With the right contract and add-ons, you can turn a lump sum of your savings into a pension-like income stream can last the rest of your life—and the life of your spouse, too.

But the world of annuities is broad—there is no single type of annuity or product—and any given contract might offer extra riders and other options that can make them more flexible, but also more complex and costly.

In this article, we’ll focus on using fixed indexed annuities (FIAs) to generate guaranteed income in retirement. (You can read about using FIAs to accumulate savings prior to retirement here.)

We believe predictable—and, if possible, guaranteed—sources of income can help investors deal with some of the major financial challenges of retirement. Annuities, along with Social Security and pensions, can provide a steady income you can use to cover essentials, helping to save you the trouble of developing a spending strategy for at least some of your retirement nest egg. (We don’t recommend putting all your savings in an annuity.) They can also ease the risk that you’ll outlive your money—a concern at a time when lifespans are growing and retirements stretching several decades—and may help you feel more comfortable investing the rest of your portfolio. 

Before getting into how they work, it’s important to note that using an FIA for income requires some advance planning. For example, you should be in a position to set aside a lump sum  before retiring—excessive early withdrawals could trigger extra fees—and then consider paying for an additional rider called a guaranteed lifetime withdrawal benefit (GLWB) that can allow your future income stream to grow over time.

The following article will provide an introductory sketch of how to use an FIA for income. We would suggest contacting a Schwab annuity specialist for a more detailed explanation. 

Let’s take a closer look.

FIA in phases

With FIAs, investors should think of them as having two phases: accumulation and payout.
In a separate article on the accumulation phase, we explained that when you buy an FIA, you turn a lump of your savings over to an insurance company, which then provides a variety of tax-deferred options for building up your savings over a set period (at rates that mat exceed the returns of certificates of deposit or Treasuries, depending on market performance). You also have the option of potentially boosting your returns by having your account track the performance of a particular stock index, such as the S&P 500® Index. Finally, the insurer guarantees that your original principal won’t fall in value (so long you as don’t make excessive early withdrawals and depending on the financial strength and claims-paying ability of the insurer).

When the accumulation phase ends, you can start making withdrawals, paying ordinary income taxes only on your investment gains (which could potentially include the 3.8% net investment income tax).1 For most FIAs, every withdrawal will draw down your savings, just like it would with any other account.    

That’s why FIA investors who are looking to lock in a lifetime income stream may choose to buy an additional rider known as a GLWB. GLWBs can provide flexibility in that they can allow you to withdraw lump sums up to an annual limit without putting your future income at risk. But they can also be a little challenging to grasp—and come at a cost.  

Guaranteed minimum income

With a GLWB, you basically pay the insurer a fee in exchange for a guarantee that you will continue to receive a fixed amount of money from your annuity even if you deplete your account. That means that even if the amount of money in the annuity falls to zero, the insurer will still pay a guaranteed minimum amount of income for the rest of your life.

An annuity with a GLWB has two parts. The first is the actual contract value, reflecting the amount you’ve saved and earned—and can withdraw as needed up to the annual limit. The other part is a notional amount used to calculate your lifetime income, known as a “protected payment base” or “income base.” With some GLWBs, the payment base might increase each year during the accumulation phase, thereby boosting your future guaranteed income, but you can’t withdraw that amount as cash. It’s more of a high-water mark, as we’ll see in the example below. It’s also important to note that withdrawals in excess of the annual limit could be subject to surrender charges and reduce the protected payment base.

Let’s consider an example.

FIAs for a monthly paycheck, guaranteed for life

John is 60 years old, plans to retire in 10 years and considers himself a conservative to moderate investor. He is looking to set aside $100,000 to secure a guaranteed lifetime income in retirement, but also wants to potentially increase his future payments.

John buys an FIA on Dec. 31, 1986, and adds a GLWB offering a protected payment base. (Note: This is a hypothetical example and these products may not have been available at that time.) John’s rider allows the payment base to grow by 7% of the original purchase amount a year until withdrawals start, for an annual fee of 0.75%.

John elects to have his returns track the performance of the S&P 500 Index, with interest accruing annually. He makes no early withdrawals and his contract caps his annual rate of return at 5%. John starts taking withdrawals at age 71.

Fixed-index annuity with guaranteed lifetime withdrawal benefit

The table shows how John’s contract value would have grown from $100,000 to $126,754 over his 10-year accumulation phase. Separately, his protected payment base would have grown to $170,000. Under the terms of his rider, John earns a 5.5% annual payout, or a guaranteed minimum payment of $9,350 a year. (Typically, payout rates are based in part on your age when you start taking withdrawals, with older investors earning higher rates than younger investors.) 

John’s payout phase starts in 1997 and he withdraws all the money from his account by 2012. His GLWB insures he continues to receive $9,350 in annual payments for the rest of his life. 

When FIAs might work 

Again, FIAs can be complex and might not make sense for every investor, especially those who are willing to take on more risk by staying invested in the market or don’t need guaranteed lifetime income.

In general, using an FIA for accumulation could work for investors who:

  • Have a lump sum of “conservative money” to invest and a desire to earmark that money to generate lifetime income in retirement.
  • Don’t want to be exposed to market risk.
  • Want to maintain access to their money, if needed, but also lock in a guaranteed income for life if they don’t.
  • Prefer the certainty of knowing exactly how much guaranteed income they can earn with a GLWB .
  • Be willing to pay for insurance in exchange for the income guarantees offered by a GLWB.

Investors who are interested in including an annuity in their retirement savings toolbox should talk with a Schwab annuity specialist. They should also work with a trusted advisor to compare FIA terms with those available from other kinds of annuities and investments.

Certain FIAs might allow you to contribute on a pre-tax basis, in which case all withdrawals will be taxed as income.

What you can do next

For more information on FIAs, please talk with a Schwab annuities specialist at 888-311-4889. You can also read about Pacific Life’s Pacific Index Choice FIA offered by Charles Schwab here.

What Financial Lessons Did You Learn From Your Mother?
Financial Planning with Fixed Indexed Annuities
Financial Planning with Fixed Indexed Annuities

Important Disclosures 

Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.
Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.

All annuity guarantees are subject to the financial health and claim-paying ability of the issuing insurance company. Neither Schwab nor its affiliates provides insurance guarantees.

A guaranteed lifetime withdrawal benefit is an optional rider available for an additional charge. It is not a contract value, cannot be accessed like a cash value, and will not preserve your account value which will deplete with each withdrawal until it reaches zero, though payments under the terms of the rider will still continue for life. Withdrawals in excess of the specified annual payout amount will permanently reduce future income.

Withdrawals prior to age 59½ may be subject to a 10% Federal tax penalty, in addition to applicable income taxes. Surrender charges may apply on certain contracts.

Charles Schwab & Co., Inc., a licensed insurance agency, distributes certain life insurance and annuity contracts that are issued by non-affiliated insurance companies. Not all products are available in all states.

The information presented does not consider your particular investment objectives or financial situation and does not make personalized recommendations. This information should not be construed as an offer to sell or a solicitation of an offer to buy any security. The investment strategies and the securities shown may not be suitable for you. We believe the information provided is reliable, but Charles Schwab & Co., Inc. (“Schwab) and its affiliates do not guarantee its accuracy, timeliness, or completeness. Any opinions expressed herein are subject to change without notice.

The S&P 500 Index is a market-capitalization weighted index that consists of 500 widely traded stocks chosen for market size, liquidity, and industry group representation.

Indexes are unmanaged, do not incur management fees, costs and expenses and cannot be invested in directly.


Thumbs up / down votes are submitted voluntarily by readers and are not meant to suggest the future performance or suitability of any account type, product or service for any particular reader and may not be representative of the experience of other readers. When displayed, thumbs up / down vote counts represent whether people found the content helpful or not helpful and are not intended as a testimonial. Any written feedback or comments collected on this page will not be published. Charles Schwab & Co., Inc. may in its sole discretion re-set the vote count to zero, remove votes appearing to be generated by robots or scripts, or remove the modules used to collect feedback and votes.