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The Only Way to Guarantee Lifetime Income Payments, Now or Later

In Kimberly Lankford’s Kiplinger article, “Add an Annuity to Your Retirement-Income Mix,” she says it best with the line “only an annuity guarantees that your income will continue no matter how long you live.”  This is important information that should not be overlooked during retirement planning.  The most basic way to determine how much of your retirement savings you should spend on an annuity is to first add up all of your monthly living expenses.  Mortgage or rent, health care costs, utilities, food, insurance and any other regular expenses should be considered.  If you have other sources of income like Social Security or a pension, subtract those from your expense total.  The remaining balance is what you’ll need covered by an annuity.  It is rarely in someone’s best interest to use all of their savings for these products, so after you eliminate your longevity risk you can invest your remaining funds elsewhere to meet other goals for the future.

A single premium immediate annuity is the most basic way to use an annuity to provide you with lifetime income.  An insurance company will start issuing you checks right away that will last either as long as you live or as long as a spouse lives as well, depending on which type of SPIA you choose.  Buying a deferred variable annuity that has a lifetime income benefit is another way to guarantee your income, it just has a little more to it than a SPIA.  Immediate annuities offer fixed payments and typically have surrender charges associated with them if you take all of your money out at once, so Kiplinger recommends only using the portion of your money that you need to cover expenses to buy your product.  Since interest rates are low right now historically, yearly payouts are not as high as they were five years ago.  Some people have found success laddering annuities, while others are combating low interest rates now by purchasing annuities that won’t pay you out until far into the future.

When you expect that interest rates are on a rising path, laddering annuities can be a good way to avoid locking in lower annuity rates.  Purchasing multiple annuities over the course of a decade or so allows you to lock in a higher interest rate with your next purchase, although this will obviously not be the case if interest rates go down.  Another benefit to laddering annuities is that your payouts increase as your age does.  Those who choose a single life annuity receive the highest payouts, followed by those with a joint life annuity then opting for a guaranteed time period of payments in addition to the joint life annuity.  But if you have a life insurance plan, you may not feel the need to make sure your annuity payouts continue over your spouse’s life or for a certain time period to your heirs.  Ensuring that your monthly payments are covered allows you to invest more aggressively in other areas with leftover retirement savings.

Since some people argue that you aren’t really benefiting from the longevity risk protection early in your retirement, it has become increasingly popular to defer receiving your income until you have reached your 70’s or 80’s.  Once called longevity annuities but more recently referred to as deferred income annuities, these products allow you to defer your payments after purchase anywhere between 2 and 40 years.  We’ve been blogging about DIA’s a lot recently because they are predicted to smash their $1 billion in sales from last year in 2013.  Payouts are smaller if you choose a refund option, but some people just prefer the peace of mind that their money is not lost should they die before receiving their income.  These products are insurance against longevity risk, as much as other insurance is there to protect you from something.  Higher payments just may be worth having this insurance no matter what the outcome of your life span is.  With 9 companies currently offering DIA’s and at least 8 more with products in the works, they will continue to be important in the annuity marketplace.

Shopping around for annuities is important, from the financial strength of the issuing insurer to the advisor helping you select the best product for your individual financial needs.  Whether using an immediate annuity to cover your monthly living expenses over your lifetime or deferring payments until a later age to receive more income, annuities are the only way to guarantee you lifetime income.

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