Immediate Annuities Meet A Variety of Needs

Retirement planning expert Walter Updegrave has written multiple books and articles about retirement and investing in our current economic conditions. He recently wrote an article for CNN Money about “How to get guaranteed retirement income for life.” A reader asked about using immediate annuities to create lifetime income and Mr. Updegrave offered up information about immediate annuity products and tips on how to determine if they are right for your personal retirement planning. Many Americans are looking into immediate annuities because of the tumultuous markets we have seen over the past decade or so. Guaranteed lifetime income not only provides financial security, but also offers emotional and psychological benefits as well. Retirees who have guaranteed income from an annuity or pension are happier than those who do not, according to multiple studies.

Immediate annuities are simple, unlike some other annuity products. You pay a lump sum of money to an insurance company and they, in turn, pay you a pre-specified amount of monthly income for the rest of your life or for you and a spouse’s lifetime. The payment is based off of how much money you spend, interest rates at the time of purchase and your current age. Your payments will be higher if you relinquish access of your money, so you should not invest all of your savings in one annuity. It’s important to have a diverse retirement portfolio that includes one or more annuity products, mutual funds, ETFs and savings. You want to have money that will capture market growth to keep up with inflation and have cash that you can use for unexpected expenses or splurges. This is in addition to the guaranteed income from your annuity.

Some people wonder why they would benefit from an annuity when they can keep all of their money in the markets and draw down from their interest and original capital. That way they retain access to all of their money and have the potential to grow it in the markets. There are two annuity benefits that make them superior to keeping all of your money invested in the markets and drawing it down as needed. You have no guarantee that your money will last as long as you live unless you purchase an annuity. Even savvy investors have the potential of running out of money before they die, especially if markets perform poorly or they live longer than their life expectancy. Annuities also provide a higher level of income than you can get by investing your own money because of mortality credits. Since some people die sooner than others, insurance companies take these mortality credits into account when setting up your payouts. Your payout consists of your principal, interest and mortality credits with an immediate annuity. You only receive your principal and interest with stock market investments.

Immediate annuities offer great benefits, but they still aren’t right for everyone’s retirement plan. Those people who have enough savings that they’ve pretty much mitigated any risk of running out of money in retirement and those whose Social Security payments will cover all of their living expenses probably don’t need an annuity. For those who do need an annuity to create a lifetime stream of income to supplement their Social Security or pension income, they should do their research before choosing an annuity product. Compare the payouts from multiple insurance companies and find an insurer with high financial strength ratings so that they can continue your payments for as long as you live. It can be wise to buy multiple annuities from different insurers in an amount that is less than the coverage offered by your state guaranty association. Immediate annuities offer unique benefits that can add value to your retirement plan, but do your homework before purchasing one to make sure that it is right for you.

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