In the wake of steep stock market declines in 2008, American workers have begun to doubt whether their tax-deferred retirement plans will be able to generate the income they will need during their retirement years. In fact, only 42% of participants in a 2009 survey still expect their 401(k), IRA, and other retirement savings plans to be a major source of retirement income — the lowest measure since the annual survey began.

If you are concerned about having a stable source of retirement income, a fixed annuity may just fit the bill.

Income Now or Later

A fixed annuity is a contract with an insurance company that guarantees a fixed rate of return during the life of the contract. Payouts can be structured to provide a guaranteed income that will last for a specific period or for life. There are two basic types of fixed annuities from which to choose.

An immediate fixed annuity is typically funded with a lump-sum premium, and income payments start immediately thereafter. This type of annuity is most often purchased at the end of a career and the beginning of retirement.

A deferred fixed annuity can be funded with either a lump sum or a series of payments. The contract will begin making income payments at a specific future date, and the future value of the contract is based on the rate of return specified in the contract. A deferred annuity allows contract owners to accumulate retirement assets over time on a tax-deferred basis.

The amount of income paid by an annuity depends on a range of variables: the amount paid in premiums, the contract’s rate of return, the age and gender of the contract holder, and the number of years over which income payments will be received. Most annuity contracts offer options that provide income payments for the rest of the contract holder’s life or for the lives of two people.

Annuities have contract limitations, fees, and expenses. Any guarantees are contingent on the claims-paying ability of the issuing insurance company. Most annuities have surrender charges that are assessed during the early years of the contract if the contract owner surrenders the annuity. The earnings portion of annuity withdrawals is subject to ordinary income tax. Withdrawals prior to age 59½ may be subject to a 10% federal income tax penalty.

A source of guaranteed income may help remove some of the uncertainty associated with retiring when the financial markets are fluctuating. Annuitizing a portion of your savings may allow you to enjoy your retirement years free of the fear that you might outlive your money.