Guaranteed Income Annuities (GIA’s)

GIAs are generally not offered by employers, but individuals can buy these annuities to create their own pensions.

You can trade a big lump sum at retirement and buy an immediate annuity to get a monthly payment for life, but most people aren’t comfortable with this arrangement. More popular are deferred income annuities that are paid into over time.

For example, at age 50, you can begin making premium payments until age 65, if that’s when you plan to retire. “Each time you make a payment, it bumps up your payment for life,” says Littell.

You can buy these on an after-tax basis, in which case you’ll owe tax only on the plan’s earnings. Or you can buy it within an IRA and can get an upfront tax deduction, but the entire annuity would be taxable when you take withdrawals.

Pros: Littell himself invested in a deferred income annuity to create an income stream for life. “It’s very satisfying, it felt really good building a bigger pension over time,” he says.

Cons: If you’re not sure when you’re going to retire or even if you’re going to retire, then it may not make sense. “You’re also locking into a strategy that you can’t get rid of,” he says.

What it means to you: You’ll be getting bond-like returns and you lose the possibility of getting higher returns in the stock market in exchange for the guaranteed income. Since payments are for life you also get more payments (and a better overall return) if you live longer. “People forget that these decisions always involve a trade-off,” Littell says.