This website presents the ideas and thoughts of a friend. The information contained within should not be used to make investment decisions. Please contact a licensed certified financial planner before making any financial decisions.

Good Luck, and Good Investing.


First of all let me say that Annuities are confusing. There are many different types of Annuities and I do not have a complete understanding of all of them. I do however think I have a good enough understanding of the type usually associated with 403(b)'s to give you a basic idea of what they are, and the type associated with a 403(b) is called a Variable Annuity.

For more, and better, information on Variable Annuities, visit the Securities and Exchange Commission's site by clicking here.

The basic idea of an Annuity is that you are signing up for guaranteed payouts over a given period of time, often over your lifetime. Annuities work with contracts, and when you sign a contract with an Annuity provider, usually an Insurance Company, you promise to give them a lump sum of money now, and they promise to give you some amount of money back for a certain period of time. In the case of the 403(b), the lump sum you give them is the amount of money you have put into your 403(b) over time. The period during which you have been making contributions to your 403(b) is called the accumulation phase, once they start giving you money back it is called the payout phase.
I am going to give you a couple examples now but keep in mind, the numbers I will use are not accurate, they will just give you a basic idea about how annuities work. Keep in mind there are many types of annuities. You really need to contact an annuity provider to get better, more accurate information, but this will give you the basic idea.
Keep in mind, these numbers are just examples and are probably not correct. For each of the following examples, we will assume you are purchasing your annuity for $100,000. In the case of the 403(b), that means that the total amount of money you have put into your 403(b) over time plus the amount your 403(b) has grown comes to $100,000. At that point you say to your insurance rep, "I want to annuitize," and your rep will explain your annuity choices. Some of the choices may be as follows.
  Example 1: Lifetime Payout Annuity  
A lifetime payout annuity guarantees that for the rest of your life you will recieve a payout on whatever schedule you specify, usually monthly. For example, maybe you decide to take payouts monthly. Your annuity provider will calculate how much you will get monthly for your $100,000 and maybe it is $480 per month. Until the day you die, you will recieve a check for $480 every month.
  Example 2: Term Payout Annuity  
A term payout guarantees a payout over some time period. For example, with the same $100,000 you may elect a 15 year payout and your monthly payment might be $550 instead of the $480. The payout is more because statistically you are expected to live longer than 15 years.
  Example 3: Guaranteed Spousal Benefit for Life  
In this example, you are married and you want to be sure that whoever lives longer, you or your wife, continues to recieve payments for their lifetime. In this case, for the same $100,000, maybe your monthly payout would only be $440 because the money needs to last you or your wife which increases the risk to the Annuity Provider that they will have to pay out for a longer period of time, so your monthly payout would be less.
In a 403(b), while you are working and making contributions, you are doing the accumulation phase of your annuity. Once you retire, and meet the age requirement, you may, if you choose, begin the payout phase of the annuity by annuitizing your investment. However you do not have to annuitize.
Remember, I am not a licensed financial planner so be sure you review all your options with a certified financial planner before you make any decisions.
Let's say you choose not to annuitize. What options does that give you? Imagine you have done this whole accumulation phase for 30 years and you retire and in your contract, which you signed when you started your 403(b), it probably says that upon retirement, you have the right to take all your money and move it into another qualified plan like an IRA with any company you want. In fact, this is typical for someone who doesn't like the 403(b) choices in their district. They liked the tax-deductible contributions and tax-deferred growth in the 403(b), so although they didn't like paying the fees associated with a variable annuity, they signed up, but they never planned to annuitize. Upon retirement, they transfer the entire lump sum, without penalty, to an IRA at the company of their choosing. Check with each insurance company to find out if they offer this option.
  Another thing to consider is that if you have a 403(b)(7) with a company like Vanguard or Fidelity, you are probably not allowed to directly annuitize your investment. If you wanted an annuity with the money in your 403(b)(7) account, you would have to take out the money, pay all the taxes on the money, and then go to an Insurance Company and purchase an Annuity. Moral to the story, if you know you want an annuity in your later years, you may want to have a 403(b) instead of a 403(b)(7).  


One final note. In many variable annuities, once you annuitize you can't easily change your mind. Once again assume that when you were 60 years old you had $100,000 that you had converted into a fixed payout annuity over your lifetime. You have been taking monthly payouts of $480 for the last 5 years. You decide that annuitizing wasn't right for you and you want your money back. You will have to pay penalties and you will not get your entire $100,000 back.
  One final thing to think about. You were 60 and annuitized $100,000 in a fixed lifetime payout and collected your first $480 payout. The next month you die. Guess how much of that $100,000 your beneficiary gets. None. That's right, an annuity is basically a gamble for your insurance company. It's not so much a gamble for you because you know you will get your $480 every month but if you die you lose it all. It's a gamble for your Insurance Company because if you life long enough, it is possible that the Insurance Company will pay out more than the $100,000 you gave them.  

Annuities are tricky, but the basics of Variable Annuities are understandable if you are willing to put in the time. Variable Annuities are not my speciality so please just use this information to get you started in asking the right questions to the right people, but hopefully this page has given you a better understanding of how they work and what they are. For more information on Variable Annuities, visit the Securities and Exchange Commission's site by clicking here or talk to some of the Insurance reps in your district.