How to Decide If a Retirement Annuity Is the Right Move for You

A retirement annuity is capable of providing continuous monthly payments that will last all your life. Retirement experts advise on purchasing retirement annuity from an insurance company if other guaranteed sources of income will not cover your basic expenses.

Potential advantages of a retirement annuity

-Regardless of how long you live or the occurrences in the stock market, you can’t outlive the money.

-Your investment is guaranteed protection against dangers such as losing money to fraud, bad advisors, and bad investment decisions.

-Contrary to what you may expect of low-risk investments, the payments are generally higher.

-You may be able to take more risks and consequently get better returns from the remaining investments.

-Annuities are protected against insurer insolvency by state guaranty associations up to some limits(usually $100000 to $300000 for each owner).

The potential disadvantages:

-For each monthly $500 payment, starting at age 65, you will need around $100000, which is a large amount of money.

-You need to commit the money upfront, and if you have an emergency later, you cant dip into it.

-Depending on the options you choose, after your death, beneficiaries may or may not get the check.

-The payout will be lower if the interests are low when you purchase compared to when they are high.

-It’s essential to select an insurance company that is financially stable to make sure your payments are truly guaranteed.

The Best Type of Annuity for Retirees

Annuities can be in many forms. A single premium immediate annuity (otherwise known as an immediate fixed annuity) is the best type for most retirees. They offer monthly payments that begin shortly after they are bought with a lump sum payment. With this form of an annuity, the payments are fixed and are not affected by the occurrences in the stock market, unlike variable annuities whose value fluctuates depending on the performance of investments that the investor chooses.

The monthly annuity payment

-The major determinants of the monthly payment are the age and gender of the people buying the annuity.

-According to Charles Schwab’s annuity estimator, a single man that invested $100000 IN AN IMMEDIATE annuity could receive $529 a month.

-A woman that is the same age would receive $501. The reduced amount reflects the woman’s longer life expectancy.

-A woman that is the same age would receive $501 (the smaller amount reflects the woman’s longer life expectancy).

-If a couple would buy the annuity together, the monthly payment could be $438 if they chose the ‘joint life’ option which pays out till the second person’s death.

Compared to any single life expectancy, the life expectancy of two people is longer. The life expectancy for males is 84, and for females, it is 86.5. According to the Society of Actuaries, there is a 50% chance that one of them will live past age 92.

If you start the annuity when you are older or if a couple chooses a reduced payment after the first person dies, the monthly payments can be higher, according to the Senior Manager of Retirement and Annuities at TD Ameritrade. If you select any of the add-on guarantees commonly offered, payments may be smaller.

For example, you could opt for ‘joint life with ten years certain.’ You and your partner would receive income during your lives, but until the end of ten years your beneficiaries would receive the remaining income payments. if you both die within the first ten years. A cash refund is another common option. It gives your heirs a lump sum equal to your original investment minus any of the payments you received.

Inflation

Many immediate annuities offer protection against some kind of inflation. Although the checks will go up over time, this option makes the initial payment significantly smaller. According to retirement experts, the inflation adjustment can be helpful if you have expectations of living longer than average. Spending of money drops as people grow older and become less active, although healthcare expenses increase towards the end of one’s life. 

‘Laddering’ annuity purchases is another option for people who wish to protect against inflation or benefit from higher interest rates. This means taking your lump sum and using a part of it to buy an annuity every few years. For example, if you have $300,000, you might buy a $100000 annuity at the beginning of retirement, another at 70, and a third at 75.

Choosing an annuity

Before choosing an annuity, you should get quotes from at least three insurers. This is because payout amounts vary. Also, you may want to buy annuities from more than one company depending on your state guaranty association’s insurance limits. For instance, if your state only protects $100000, you could buy $100000annuities from three different companies to stay within limits.

Even though this insurance is in existence, it is not a substitute for making sure you only buy annuities from those companies that are financially strong. Resolving insolvencies takes time, and for years, your payments could be held up.

You should be sure that the company is well off financially that they can make the payment long term to you. Also, check the insurer’s ratings with one or more rating agencies. An ‘A’ rating indicates the company is strong enough financially to be around and meet your needs.