Expert: Gina Boykin - 8/23/2008

Question
Hi,

My wife and I are retired and have good incomes and get social securty. I have a TIAA annuity and she has a pension.

Each of us have a couple of hundred thousand in additiona savings.

My wife just took half of her additional money and put it in a three-year Fidelity annuity.

I had thought that an "annuity," by definition, made periodic payments. (Otherwise, I thought, it would be no different from other products. But my wife believes that her new annuity has no periodic payments. (I guess the increases--if there are increases--just go back in the pot.

Question: What makes her "annuity" and "annuity."

Many thanks,

Steve

Answer
Annuities can be very confusing.  That's because there are different types, and different ways to be paid.

All annuities are a way to accumulate money so that you have an income stream (the periodic payments you mentioned) in retirement.  These payments may be guaranteed for life, or for a specific period of time.  The rate can be guaranteed (fixed) or not(variable).  Annuities have the same two phases, and you don't receive payments until the 2nd phase.  

The first phase is the 'Accumulation Phase'.  This is the period where you add money, or the money grows.  The longer this phase, the more money you should have when you're ready to start receiving payments.

Next is the 'Annuitization Phase'.  This is when you start to receive payments.  Annuitization happens when you move from the first phase to the second phase.  Depending on the type of account, this phase can start automatically when you reach a certain age, after a certain period of time, or not until you request payment.

It sounds like this 3-year period may be the accumulation or savings phase.  The account is building at this time and you will receive payments after the 3-year period is over.  However, it could be that the 3-years means that the rate you will receive is fixed for the first 3 years and will vary after that (just like an adjustable mortgage, the rate is fixed for a short period of time).  You may be able to withdraw at any time, but they are just waiting for you to request payments.  In this case, the account will just continue to grow until you ask for the money.

I would suggest calling Fidelity and clarifying this with them.  I looked on the website, but I can't see the details of your specific plan.  When you are talking with their representative, also make sure that you know whether your payments are guaranteed for the life of the account holder, for the life of both of you, or just for a specific period of time.  It is important for you to know these details for estate planning.