The Search for Security at Retirement
by Efin Advisor | March 21, 2009
What’s more important to today’s retiree: flexibility in investing or rock-solid dependability? It will come as no surprise that the pendulum is swinging in answer to that question, from the former to the latter.
A recent survey reported in investmentadvisor.com found that those at or nearing retirement “expressed significantly lower levels of financial comfort, greater concern about further market declines, and higher interest in guaranteed income streams for retirement” than one year ago.”
Where once “the ability to make decisions about how money is invested, diversified, and allocated” was held as the most important factor, now it is the safety and sustainability of a “guaranteed payment stream” above all else.
One such product for creating that kind of stability for retirement is the Annuity.
In the U.S. an annuity contract is created when an individual gives a life insurance company money which may grow on a tax-deferred basis and then can be distributed back to the owner in several ways. The defining characteristic of all annuity contracts is the option for a guaranteed distribution of income until the death of the person or persons named in the contract. Perhaps confusingly, the majority of modern annuity customers use annuities only to accumulate funds and to take lump-sum withdrawals without using the guaranteed-income-for-life feature.
Annuity contracts in the United States are defined by the Internal Revenue Code and regulated by the individual states. Variable annuities have features of both life insurance and investment products. In the U.S., annuity contracts may be issued only by life insurance companies, although private annuity contracts may be arranged between donors to non-profits to reduce taxes. Insurance companies are regulated by the states, so contracts or options that may be available in some states may not be available in others.
How would an annuity work for those who are at or close to retirement age? For example, suppose a husband and wife, both 65 years old, have saved $1,000,000 saved for retirement but have an income need of $45,000 annually. “In order to guarantee this income for both their lives in an immediate annuity they would need to deposit $647,946, leaving $352,054 to further invest or save for possible inheritance.” If the same couple was interested in a cost of living increase of 3% on this immediate annuity, they would need to deposit $872,622. This would leave them with a 4.5% income guaranteed which increases by 3% annually while keeping $127,378 available for emergencies.”
A common income strategy for annuities is to determine the fixed expenses you will have during retirement and the figure for the required deposit into the immediate annuity. This gives retirees an income guarantee for their fixed expenses and allows them to stay in the market with remaining assets to act as their longer term inflation hedge.
This is sage advice. My wife and I put most of our money into annuities and it has paid of well for us. We are living comfortably with less fear than many of the people who live in our community are. I highly suggest you talk to your financial planner about investing in annuities
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This even seems like a good idea for us young’ins to do. Instead of potentilaly putting money in a CD it may make sense to try and get it paid out every year so you earn money and can continually reinvest. I may go talk to my financial planner about investing in this.
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I am confused, do I pay into a policy where I get the money back at the end, or do I buy an annuity for $600K and then not get it back. It seems like careful spending and investing in an index fund would provide greater gains over time than this would. If I already have a life insurance policy, can I get an annuity on top of it, or do I have to buy a separate one? Any help or answers could be really helpful.
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