When it comes time to finally retire and start living the good life how much money are you going to need and how long do you need it to last so that you can do the things you want to do? According to World Health Statistics in 2014 the average male will live to age 80 and the average female will live to 84 ( I had too many jokes about why women live longer than men that I couldn’t choose). So if you retire at age 65 your retirement nest egg needs to last you approximately (84+80/2=82) 17 years. How can you guarantee that you won’t out live your savings and have guaranteed income every year that you can count on? That is where annuities can help you provide security and peace of mind knowing that your guaranteed to have income until your last day.
What is an annuity?
An annuity contract is an agreement with a life insurance company to provide you with a series of income payments (monthly, yearly etc.) for a specific time period. There are many types of annuities with different payment amounts, timing and how long the payments last. Also there are different tax treatments depending on the type of annuity you choose so its important that you sit down with an experienced advisor that can look at your entire retirement plan and help you choose the right annuity for your situation.
What kinds are there?
To keep it simple there are basically 7 types or features of annuities:
- Registered or unregistered annuities –
- Term or life annuities
- Single or joint life annuities
- Indexed or non-indexed
- Immediate or deferred annuities
- Normal or prescribed annuities
- Fixed or variable annuities
What are the payments and guarantees?
With a term annuity you have a guaranteed payment for a specified term and if you happen to pass away before the term is finished, your beneficiaries or your estate will receive the remainder of the payments. A life annuity will make payments to you until you pass away, even if it’s after the first day you take out the annuity. There are however options you can choose that will pay your beneficiaries in the event of an early death. An annuity with a guaranteed premium return will have a lower payments than a straight annuity so you have to consider what is more important – a guarantee or a higher payment.
What should you consider when buying an annuity?
When deciding on purchasing an annuity there are many things you need to consider:
- Do I want to give up control of my capital?
- When you buy an annuity your capitol is locked in.
- Do I want guaranteed life income?
- In exchange for giving up access to your capital you get income for life.
- Will there be anything left for my estate?4
- You can choose options to guarantee your capitol, a number of minimum payments or purchase a life insurance policy naming the estate as the beneficiary.
- Do I want to be locked into the current rates?
- The annuity is locked in at the rates at time of purchase even if rates go up or down.
- What about inflation – is the annuity indexed?
- Prescribed annuities cannot be indexed and the purchasing power of the payments will decrease over time because of inflation.
Annuities can be a great tool to help meet your retirement income goals by providing guaranteed income for life. In order to have these guarantees you need to give up control of your capital. Before you purchase an annuity its important to understand how they work, what type fits your needs best and what will happen to your capitol should you die early (be sure to knock on wood after buying an annuity and forward all chain mail you get). As always I can’t stress enough that you sit down with an experienced advisor that will take the time to go over your situation and make a recommendation that fits your needs.
Andrew W. Bradley