Create Your Own Pension with an Annuity

photo_77274_20160913If you’re like many Americans, you do not have pension income to look forward to in retirement. The trend of self-sufficiency in our Golden Years is not likely going anywhere, making it imperative to take matters into our own hands and create our own retirement income. One income option source is a fixed annuity, which can provide reliable monthly cash for the rest of your life. Here are some smart annuity moves that can help you get on the right annuity track, from the experts at Motley Fool.

First, some basics. An annuity is a contract with an insurance company or financial services company. Typically, you pay a lump sum up front, and in return, the company promises to pay you monthly, starting at a predetermined date. Many contracts offer payments until the end of your life. And some allow for continued payments until both you and your spouse have passed.

There are a variety of annuity products available, including immediate, deferred, fixed, variable, and combinations of each. In general, fixed annuities offer the most appeal with fewer drawbacks, however the other types have their place in certain portfolios. When it comes to advice on purchasing an annuity, these three points are often mentioned:

In addition to these general rules of thumb, here are a few other smart moves you can make today.

Consider a deferred annuity

Sometimes referred to as longevity insurance, a deferred annuity is a fixed annuity that doesn’t start paying immediately. A 70-year-old man might spend $50,000 for an annuity that will pay him $850 a month for the rest of his life, beginning in 10 years. If you think that you have enough money saved up for about 20 years, you might consider buying a deferred annuity now that would start paying you in 15 or so years. That way, you can be sure that you won’t outlive your money.

That’s what a deferred annuity does, offers peace of mind. They free up elderly recipients from having to manage their own money, at a time when many don’t want to be bothered with it. And you’ll get bigger payouts if they’re deferred. This is because the insurance company gets your money early and can invest it. They also expect to make fewer payments to you considering you’ll be older when you start getting paid.

Be careful how you buy your annuity

Another smart annuity move is to shop around for the best product. Avoid buying one from someone who has sought you out, via a cold call or an investment seminar for example. Unfortunately, there are a lot of people trying to sell annuities, and some will engage in misconduct to do it. Before you sign on the dotted line, find out whether your advisor is held to the “fiduciary” standard. This requires offering advice that is in the client’s best interest. Non-fiduciaries can get away with offering recommendations that may earn them bigger commissions, regardless of how good they are for you. Another option is to skip the middleman, and contact a trusted insurance company directly. Your brokerage might even offer annuities.

Consider “laddering” your purchases

Keep in mind that annuities can fluctuate with interest rates, offering lower payments when rates are low. Since rates are near historic lows, it might be worth delaying the purchase of an annuity until rates rise. The Fed recently raised rates a bit, and are expected to increase further in the coming years. Of course there is no guarantee of this. If you would rather buy now, you can deal with low-interest rates by using the “laddering” strategy. Here, you divide your total planned annuity purchase into chunks and buy installments over time. For example, you buy a third of the annuity income you want now, and another third in a few years when rates are likely to be higher, and the last third even later.

Fixed annuities can definitely help generate income in retirement, but they aren’t your only option. Investing in dividend-paying stocks is another option. Whatever you do though, it is not recommended that you leave your entire retirement up to Social Security exclusively. The average Social Security benefit was recently $1,350 per month, or approximately $16,000 per year. If you don’t think that enough (which it most definitely wouldn’t be), consider other income streams, like annuities.

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