2 Best Annuities to Build a Pension – Buffalo NY
For people without pensions, the guarantees of annuities with lifetime income are attractive, despite the fees.
There are two types of annuities with future income guarantees, and each insurance company has its own variants. I’ll outline how they generally work, based on an initial investment of $100,000 and assuming that you’re not withdrawing any money:
An annuity with a guaranteed minimum withdrawal benefit. The company promises to pay you a lifetime income of, say, 5 percent of the value of your account. Every year, your account goes up by a fixed amount—the “step-up,” now also 5 percent—regardless of what happens to the investments inside your annuity. At the end of 10 years, your account value will have risen to about $163,000. You can then withdraw 5 percent of that amount, per year, for life—even if your annuity is worth less than the money you put in.
An annuity with a guaranteed minimum income benefit. In this case, the insurance company guarantees that your benefit base will increase by a fixed annual amount—say, 5 percent. In the future, you can turn that into a fixed annuity that pays you a monthly income for life.
In theory, the investments in either annuity could earn even more than the guaranteed 5 percent. But in real life, that’s not likely to happen. The annuity’s expenses can exceed (are you ready?) 3.5 to 4 percent a year, including the cost of buying income for your spouse if you die first. The market has to boom for you to beat the guarantee, after costs.
But a pre-retiree today might be very happy to lock in a 5 percent increase in his or her principal for the next 10 years.
Over the past year, insurance companies—worried about the future profitability of these deferred income annuities—have started to raise the fees and reduce the benefits. They’re still a good buy. The terms offered today are likely to be reduced again.
If you bought an annuity during the fat years of 2004 to 2006, you can add money to it, on the older, more generous terms.
Mintco Financial Advisors can help you understand how all the contracts work. How you title these annuities—who’s the owner, who’s the beneficiary, who gets the income after a death—is complex. If you make a mistake, your spouse might be cut out or extra taxes might be due.
Now let me switch gears and talk about people who want monthly income immediately. You can get it from these annuities, but it usually stops the guaranteed annual step-up in value.
Financially, you could do better by putting part of your $100,000 toward a plain vanilla immediate-pay annuity that gives you fixed lifetime payments, starting now .
Put the rest of the money in something safe—say, a high-quality municipal bond. Together, they’ll pay you a higher monthly income than you’d get from the higher-cost income annuities, discussed above. You might also choose a stock-and-bond mutual fund instead of a muni bond, to try for more growth.
The difference is control. If you die before using all the money in the immediate annuity, it might go to the insurance company. With the newer, deferred-income annuities, it goes to your heirs. That might seal the deal.
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