Whether retirement feels like a lifetime away or right around the corner, it’s never too early to discuss your long-term savings plan with your spouse or partner. If you want a way for both of you to receive steady retirement income throughout your lifetimes, consider investing in a joint and survivor annuity. This investment fund makes payments to an annuity owner until their death, at which time a surviving beneficiary will receive money from the fund. Not sure exactly how it all works? We explain what a joint and survivor annuity is and the pros and cons of this investment.
What Is a Joint and Survivor Annuity?
A joint and survivor annuity is an investment product that provides guaranteed income to an investor and their beneficiary, such as a spouse. When you purchase a traditional annuity, you pay a lump sum or make payments to an annuity fund. In return, you receive payouts from the annuity fund during retirement. This fund provides a steady source of income so you don’t outlive your savings.
With a joint and survivor annuity, you name another person, known as a secondary annuitant, to receive payments from the annuity after your death. Many couples invest in joint and survivor annuities to ensure surviving partners can continue receiving annuity payments throughout their lifetimes.
There are different types of joint annuities you can purchase. A fixed annuity can be a good option for those who prefer a guaranteed rate of return on their investment. With this type of joint annuity, your investment will grow at a tax-deferred, fixed rate for a specific period, usually up to 10 years.
What’s the Alternative to a Joint and Survivor Annuity?
You can also consider investing in two separate annuities, one for both you and your spouse. This annuity, known as a single-life annuity, will only benefit the owner. Unlike a joint and survivor annuity, a single-life annuity won’t transfer payments to the surviving spouse when the annuitant dies. However, by splitting your investment into two annuities for both you and your spouse, you can each receive income from the separate funds until your respective deaths.
Typically, a joint and survivor annuity will provide smaller payments than a single-life annuity, since it’s split between two people. However, a single-life annuity will stop making payments once the owner dies. With a joint annuity, the secondary annuitant can continue receiving income.
Of course, there are other ways you can prepare for retirement and provide for your spouse. You can invest in a high-yield portfolio of bonds or dividend stocks. You can also choose to have your spouse inherit your investment accounts, such as an IRA.
What Are the Pros and Cons of Joint and Survivor Annuities?
Like all other investments, there are benefits and drawbacks to a joint and survivor annuity. Discuss this option with your spouse and work with a financial adviser to determine if it’s a good investment for you.
The pros of a joint and survivor annuity are:
- Protection for the surviving partner: The biggest benefit of a joint annuity is that it provides continuing income for a surviving spouse after their partner’s death. If you want to guarantee your loved one’s financial protection after your death, a joint and survivor annuity is a great option.
- Guaranteed income in retirement: People are living longer these days, and a joint annuity can help you and your spouse enjoy your golden years together. You’ll continue to receive payments throughout both of your lifetimes.
The challenges of a joint and survivor annuity include:
- Lower payments for the secondary annuitant: Some joint annuities reduce the payments to a secondary annuitant by as much as 50%, according to the Internal Revenue Service. For example, if you receive $5,000 payments each month as the primary annuitant, your spouse may only receive $2,500 each month after your death.
- Penalties for early withdrawal: Like other types of annuities, joint annuities usually have penalties for early withdrawal of funds. For this reason, it makes the most sense to use a joint annuity as a retirement savings plan, rather than a liquid account.
When deciding whether a joint and survivor annuity is right for you, consider factors like the amount you have to invest, the income you’ll need to live comfortably in retirement, and other assets you may have to support your spouse or partner financially after your death.
A joint and survivor annuity can be a valuable tool to save for retirement and ensure your loved one will be taken care of after your death. Plan a financial date together where you can discuss your long-term savings plan and determine whether a joint annuity will be a good investment for your future.
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