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SPIAs & DIAs Are Good Lifetime Income Strategies, According to USA Today

In an excellent special article for USA Today, Robert Powell gives us the best “Ways to avoid outliving your income.”  Since we don’t know when we will die, retirement finance planning is tricky.  We have to plan for our life expectancy and the life expectancy of our spouse for those who are married.  Important planning has to be done so that we can manage longevity risk and maintain our lifestyle as long as we live.  In addition to planning for our income needs, we also need to plan for what the article refers to as “shocks”.  Unexpected expenses have to be accounted for in some type of savings.  As we age, we are much more likely to have unexpected health care costs.  It’s also possible that your car dies and you need a new vehicle or your house floods and you have to pay to fix all of the damage.  Having money set aside for unexpected shocks goes hand in hand with planning for your retirement income needs.

Single premium immediate annuities are one of the best ways to meet your income needs in retirement.  First, add up all of your expected expenses in retirement.  Then deduct any other sources of guaranteed income you will have coming in, like social security or pension income.  A SPIA can then be purchased to cover the gap between your expenses and how much income you have coming in.  These annuities also eliminate the risk of you outliving your assets because the guaranteed lifetime income is secure.  SPIAs are good products for people who don’t have the ability or willingness to manage their own portfolio.  Since single premium immediate annuities are set up for life, they are good protection when cognition declines later in life.  The article recommends paying off your mortgage before or soon after retiring, especially if you find that your expenses will be much higher than your income.  It’s important to compare annuities because the pricing can greatly vary.  Some people like to ladder their immediate annuities to take advantage of potential rises in fixed annuity rates.  The benefits of a laddering strategy include higher lifetime income, lower risk, a better potential for growth, more flexibility and liquidity.  Inflation is a fairly certain thing.  You can account for it in your SPIAs by purchasing an inflation-adjusted product or using fixed step-ups instead.

There are different ways for single people and couples to claim Social Security.  One expert in the article recommends that the older and/or higher paid spouse delay social security until age 70.  This allows the younger and/or lower earning spouse to get half of their spouse’s benefits and leaves a higher survivors’ benefit to the spouse who lives the longest.  Try to use expert software to determine the best way for your family to claim your social security benefits.  Something else to consider when it comes to your annuity or pension payouts is whether or not to choose the joint and survivor option.  Although your income will be smaller while alive, your spouse will continue receiving payments until their death as well.  It’s often a good strategy when both spouses are in relatively good health.  Some people recommend laddering TIPS to create retirement income.  The expert in this USA Today article argues that this strategy is complicated, expensive and doesn’t offer longevity protection.

Finally, deferred income annuities are a good way to provide retirement income.  Some people buy them and opt to receive payments late in life, closer to age 85, but others opt to receive the money sooner.  The longer you delay payments, the higher those lifetime payments will be.  By taking advantage of the time deferral and the mortality credits from the life insurer, you are able to receive substantial income payments throughout your retirement.  The Society of Actuaries recently found that most people are self-insuring instead of using these strategies to transfer their longevity risk to someone else.  Instead of gambling on the fact that you won’t run out of money in retirement, speak with an expert about single premium immediate annuities, deferred income annuities, and your other options for protecting your finances in retirement.

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