Joint & survivor annuities: Basics, pros, cons & examples

As someone who cares about your financial future, you've likely spent time planning for it. When you plan ahead, you have several options for ensuring that your spouse is financially protected after you're gone. A joint and survivor annuity is one tool you can use to set up a guaranteed income for you and your spouse.

When you learn how joint & survivor annuities work and the benefits they offer, you can decide if they fit with your overall financial plan as a way to reinforce your financial well-being.

A joint and survivor annuity is a type of annuity that guarantees payments for as long as you and your spouse are alive. It's designed to provide an income stream for couples to guarantee payments to the survivor even after one of you dies. A joint and survivor annuity can ensure a financial safety net for your loved one even after you're gone.

Joint and survivor annuities are flexible in offering different payout options to accommodate your needs. You can choose a 100% survivor benefit that continues providing the full payment amount to your surviving spouse or a reduced payment (such as 75% or 50%) that pays less but may help meet the income needs of the survivor. These joint and survivor payout options allow couples to tailor the annuity to their financial needs and preferences for their retirement years.

Joint and survivor annuities are established through a contract with an insurance company. The annuity can be funded with a lump sum payment, such as money from a savings account, CDs, or other types of investments. You also may roll over a 401(k) balance or transfer IRA dollars to an annuity that pays a joint and survivor stream of income.

Payouts usually happen monthly, but they must occur at least annually. You can decide how often they will be. Joint and survivor payments last for the life of the couple, and you even can select a guarantee period as well. For instance, a couple can elect a joint and survivor payout with a guarantee period of 10 years. This means if the couple dies within the first 10 years, their beneficiaries can continue the income stream for any years remaining.

For an example of how a joint & survivor annuity works, let's say Kevin and Marie select a joint and survivor income stream. They pay a lump sum premium of $200,000. Assume the annuity payments will be $1,000 per month for as long as either Kevin or Marie is alive.

If Kevin dies first, Marie will continue to receive the $1,000 monthly payments for the rest of her life. Conversely, if Marie dies first, Kevin will receive the same $1,000 per month for his lifetime. This ensures that both Kevin and Marie have a steady income stream as long as either one of them is living—providing financial security for the couple’s lifetime.

In addition, they may want to add a guarantee period to their payout options. Assume they selected a joint and survivor income with a 15-year guarantee period. This means if they both die within the first 15 years, their beneficiaries can continue the income stream for the remainder of the guarantee period.

Joint and survivor annuities can be beneficial for people in a few different scenarios:

• Married couples. This is the most common reason people get a joint and survivor annuity. It provides a guaranteed income stream for the surviving spouse, who often will need help covering living and lifestyle expenses after a partner's death.

• Couples who want to create a guaranteed minimum income. If you and your spouse are concerned about running out of money in retirement, a joint and survivor annuity can guarantee a reliable income source.

• Risk-averse retirees. If you prioritize steady, predictable income over potentially higher returns, a joint and survivor annuity can guarantee payments throughout your lifetime.

Joint and survivor annuities are not ideal for everyone. For instance, if you need ready access to this part of your retirement savings, that money should not be placed in an annuity. If you have a significant estate that will provide for your spouse after your death, you may not want a joint and survivor annuity. There are a number of options to explore regarding your retirement income plans.

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Dive deeper

Joint and survivor payouts depend on your desired income strategy. Here's a breakdown of the common types:

• Fixed payout. This is the most common option. You and your spouse receive a guaranteed, predetermined annuity payment while either of you are alive.

• Increasing payout. You may elect to tie your income stream to a fixed percentage increase (such as 1, 2, 3%) or a CPI-adjusted increase. While your initial payments will be smaller, this type of payout may assist with the risk of future inflation.

• Reduced payment after first death. You may elect a reduction in payments upon the death of the first spouse. When one person dies, the survivor's payout is typically reduced by a fixed percentage (often 50%) but continues for their lifetime.

• Joint and survivor payout with a guaranteed term. You may elect a guaranteed period to protect your beneficiaries if you both die earlier than you expect. The guaranteed period ensures that the insurance company will make payments for at least the specified time frame, whether to you or your spouse, or to your beneficiaries after your deaths.

The payout structure you choose depends on your priorities. Discuss your risk tolerance and income needs with a financial advisor to determine the best annuity type and payout option for your joint and survivor annuity.

Joint and survivor annuities offer multiple benefits, but as with any financial strategy, this is not for everyone. Consider both the advantages and drawbacks of setting up a joint and survivor annuity.

• Multiple payout options. Joint & survivor annuities offer different payout options to accommodate the needs of the annuitants.

• Predictable income for life. Payments remain consistent throughout your life and the life of the beneficiary, making it less likely you'll outlive your income.

• The option for increasing payouts. Selecting fixed increases or CPI adjusted increases may help reduce the effects of inflation on your retirement income.

• Survivorship. Payouts continue while you and your spouse are alive. Survivorship planning is an important estate planning consideration in addressing future income needs and tax consequences.

• Compliments your savings, investments and Social Security. A joint and survivor annuity can help bridge the gap between retiring and claiming delayed Social Security benefits without liquidating savings from retirement accounts.

• Ease of setup and management. Once you purchase an immediate annuity, there are no additional steps and nothing to monitor.

• Income not subject to market fluctuations. The annuity payouts are not subject to the volatility of the market.

• Lower initial payments. Because the annuity is designed to last longer than just one person's lifetime, the initial monthly payments are typically lower compared to a single life annuity. This reduction accounts for the possible extended payment period.

• Lack of flexibility. Once the joint and survivor payout is established, you may be prohibited from taking out any additional money. Even if your contract allows you to take an ad hoc withdrawal, you likely will have charges and penalties after doing so.

• Inflation risk. If you select a fixed payment, it will not be increased to account for inflation. Be sure to consider fixed percentage or CPI adjusted payout options.

• Opportunity cost. The funds used to purchase the annuity are no longer available for other investments that might offer higher returns, limiting the overall growth potential of your portfolio.