Best Annuity for Retirement Income
Best Annuity for Retirement Income
2 Types of Annuities for Guaranteed Income
When it comes to annuities, the variety and complexity of choices can be confusing.
But for anyone who’s retired or approaching retirement looking to turn a portion of their nest egg into guaranteed lifetime income, the choice comes down to two types: an immediate annuity or a longevity annuity.
Compared to other annuities at least, both immediate and longevity annuities are relatively easy to understand.
What’s more, recent research studies have concluded that both of these annuities can actually enhance one’s retirement security.
What is an Immediate Annuity
Immediate annuities, also known as SPIAs (single premium immediate annuities), could hardly be simpler in concept.
You give an insurer a lump sum of money (the premium) and in return you get a monthly payment for as long as you live, regardless of how the financial markets are behaving.
Today, a 65-year-old man who invests $100,000 in an immediate annuity would receive roughly $565 a month for life, a 65-year-old woman would get about $545 a month and 65-year-old couple (man and woman) would collect about $480 a month as long as either is alive.
You may think that you could generate the same amount of income investing on your own.
But you can’t unless you take more risk (which raises the possibility of depleting your assets too soon).
What gives the annuity its edge is that each annuity payment you receive contains not just interest and return of a portion of your principal but an extra “return” known as a mortality credit.
Do you need an immediate annuity?
Immediate annuities also have drawbacks, however. If you die soon after purchasing an immediate annuity, you’ll receive relatively little in monthly payments or, to put it another way, you’ll be the one providing those mortality credits to annuity owners who live long time.
To get the largest monthly payment, you must also agree to give up access to your money, which means it’s no longer available for unanticipated expenses, emergencies or to pass on to your heirs.
So devoting all or even most your nest egg to an immediate annuity wouldn’t be a good move.
Indeed, if Social Security (which is also essentially an annuity) is enough to cover all or most of your living expenses, you may not need an immediate annuity at all.
Immediate Annuities for Women
When it comes to generating a retirement paycheck that will last the rest of your life, there’s no single answer that is appropriate for everybody.
Your answer depends on your goals and circumstances.
It’s often recommended that you split your retirement savings between annuities and systematic withdrawals, so that you diversify your retirement income and realize the advantages of each method.
If you’re considering buying an immediate annuity because you want to be sure that you will have guaranteed income as long as you live, then an immediate annuity can be a reasonable, or even an excellent, choice.
Indeed, besides being an efficient way to turn retirement assets into income you can’t outlive, research shows that people who have annuity-like income in retirement tend to be happier than those who don’t, presumably because they derive a sense of security and comfort from knowing those annuity payments will keep coming in every month even if the financial markets are in major meltdown mode.
But this isn’t a move you want to make lightly.
Once you buy an immediate annuity, you give up access to your funds in return for the promise of lifetime payments.
Should I buy an immediate Annuity
Before you invest any of your money in an immediate annuity, you first need to ask yourself whether you and your wife actually need more guaranteed income than Social Security provides.
That’s a judgment call, but one test is to gauge whether the monthly income you get from assured sources like Social Security and any pensions is enough to cover your essential living expenses, such as groceries, rent or housing costs, health insurance and medical expenses, etc.
Generally, if Social Security plus any pension income covers the basics, then you may be able to get by using that income to pay day-to-day expenses and then rely on the rest of your savings to handle unexpected expenses, pay for emergencies and fund spending on travel, entertainment and other discretionary activities.
But if Social Security and pensions fall short of covering all or most of basic living costs — or if you would simply feel better having the extra cushion of more guaranteed income — then you might want to devote some of your savings to an immediate annuity, while leaving enough to cover emergencies and nonessential expenses.
What is Longevity Annuity?
A longevity annuity works much like an immediate annuity in that you turn over a portion of your savings to an insurer for the guarantee of lifetime monthly payments.
The difference is that even though you pay the premium now, the longevity annuity’s payments don’t start until later, often many years later.
The idea is that by investing a relatively small amount in a longevity annuity you can lock in a relatively large payment down the road that might prove helpful in the event you overspend early in retirement or underestimate your future expenses.
Like an immediate annuity, a longevity annuity provides guaranteed income for life, except that while you invest your money now, the payments don’t begin until later, typically much later, say, 10 to 20 years in the future.
In effect, buying a longevity annuity is a bit like buying a life insurance policy, but instead of making a payment to your heirs when you die, a longevity annuity makes monthly payouts to you for the rest of your life, assuming you’re still alive when those payments are scheduled to begin.
Think of it as a form of insurance against living so long that you deplete your savings.
If you feel you could benefit financially or emotionally from having more guaranteed lifetime income, then the question is what’s the best way to get that income.
Annuities and heirs
There is a common misconception about annuities that goes like this: if you start an immediate lifetime annuity and die soon after that, the insurance company keeps all of your investment in the annuity.
That can happen, but it doesn’t have to.
To prevent it, buy a “guaranteed period” with the immediate annuity.
A guaranteed period commits the insurance company to continue payments after you die to one or more beneficiaries you designate; the payments continue to the end of the stated guaranteed period usually 10 or 20 years (measured from when you started receiving the annuity payments).
Moreover, annuity benefits that pass to beneficiaries don’t go through probate and aren’t governed by your will.
Annuity Income: Is It Safe?
Because the income from an annuity is backed by an insurance company, financial advisors and financial literature usually refer to it as guaranteed.
But that doesn’t mean it’s a 100% sure-thing.
Just like any company, insurance companies can go belly-up.
It’s not common, but it’s certainly not impossible, especially given that:
- The longer the period in question, the greater the likelihood of any given company going out of business, and
- The entire point of a lifetime annuity is to protect you against longevity risk (that is, the risk that you last longer than your money). So presumably, we are talking about a fairly long period of time.
However, if you are careful, the possibility of your annuity provider going out of business doesn’t have to keep you up at night.
Check Your Insurance Company’s Financial Strength
Before placing a meaningful portion of your retirement savings in the hands of an insurance company, it’s important to check that company’s financial strength.
Checking with multiple ratings agencies, such as Standard and Poor’s, Moody’s, or A.M. Best. (Note that each of these companies uses a different ratings scale, so it’s important to look at what each of the ratings actually means.)
Does the State Which You Purchase an Annuity in Matter?
Annuities are one of the most diverse retirement investment products available in the marketplace.
They come in all shapes and sizes. While this fact is widely known, what many people do not realize is that annuities vary greatly from state-to-state.
Buying a product with the same name from the same company in one state could yield completely different results than buying the same product from the same company in a different state.
Annuities as a whole are valued differently from state-to-state because each state has different tax laws and tax codes which can greatly influence the way a product is designed as well as how it pays out upon annuitization.
Rates, features and benefits all can vary widely based on the rules and individual tax codes of each state.
Other key factors which can differ from state-to-state are free-look provisions and market value adjustments.
As a quick example, the state of California rarely offers long-term healthcare riders (long-term care supplements) which are often found in annuities issued in most other states.
Some states also have special annuity taxes beyond the normal differential in the tax rates from state-to-state.
If you are planning on moving, than it is wise to find out the tax rates in the state you live in and the one you intend to move to.
Depending on the circumstances, it could be beneficial to buy the annuity prior to moving or to wait on purchasing until after you move.
The best solution is to get rate comparisons in multiple states.
This is why it is extremely important to find an advisor who has your best interest at heart and provides multiple effective strategies specifically tailored towards the client’s needs.
Where to buy an Annuity
Before buying any annuity you’ll want to take time to shop around, compare quotes and take other steps to make sure you’re getting good value for your annuity buck.
If you’re concerned about running short of income late in retirement, a longevity annuity is worth considering. Just leave yourself lots of time to fully consider the pros and cons before you decide whether to commit.
Let us help you with reaching those retirement income goals.
Sixty-six percent of Americans say they’re extremely or somewhat concerned that they’ll outlive their income in retirement.
That’s a lot of people.
Ten percent of Americans have less than $5,000 saved for retirement.
And a walloping 21 percent say they have nothing saved for the future.
If you’re one of the people who hasn’t saved enough for retirement, or if you’ve saved for retirement but you’re worried about outliving those savings, we might be able to help.
Contac us at 813-964-7100 to schedule a meeting.