In the coming months, you’ll be hearing more about annuities as a solution to outliving your savings, especially immediate annuities.
The White House said last week it plans to promote “the availability of annuities and other forms of guaranteed lifetime income, which transform savings into guaranteed future income, reducing the risks that retirees will outlive their savings or that their retirees’ living standards will be eroded by investment losses or inflation.”
Income for Life
For retirees and near retirees, the annuity type that is getting a lot of attention right now is the immediate fixed annuity ,also called life annuity or single premium immediate annuity (SPIA).
The concept of an immediate annuity is simple: you give an insurance company a lump sum of money; it gives you a contract guaranteeing how and when you receive payments that include interest on your money. The amount of money you receive depends on the contract terms including your age, gender, ownership and payment terms.
It is this contracted guarantee that makes an immediate annuity an attractive way to manage risk of outliving your money.
A study from Americans for a Secure Retirement conducted by Ernst & Young, LLP, warns that “…many American will be forced to reduce their standard of living, some by as much as 51 percent, to avoid outliving their financial assets and that households with a guaranteed source of retirement income outside of Social Security, such as a lifetime annuity, showed greatest chance of financial success.”
5 questions about annuities
The good news is that immediate annuities are pretty straightforward. Here are a few questions you’ll want to answer if you consider an annuity as part of your retirement portfolio:
1. How much of your retirement savings will you use to purchase an immediate annuity? Financial experts advise that this type of investment is best for only part of your savings leaving you adequate money for unexpected expenses and risks that are not insured.
2. Do the annuity payments just apply to your life, or to you and your spouse (joint and survivor)?
3. Does your annuity payment include inflation protection?
4. Is the insurance company financially strong and one that you have confidence will be there to pay throughout your lifetime?
5. Have you compared immediate annuity quotes from several companies to make sure you are getting the right annuity for your needs?
An immediate annuity is like creating your own pension plan. Like any financial product, it may or may not be the right solution for your retirement needs. And purchasing an immediate annuity is a permanent decision, so consider your options carefully.
An immediate annuity does have the benefits: it increases the probability that your savings will last a lifetime; it makes budgeting easier by giving you predictable payments; and it provides peace of mind knowing that these funds are not subject to market fluctuates and are guaranteed.
