YOU, RETIREMENT, AND ANNUITIES
Although there are a few workers lucky enough to have an employer still offering pensions that pay a monthly benefit unrelated to the stock market, other options like 401(k) plans have virtually made pensions obsolete. Today, most employees are not only faced with deciding how to manage their own funds, but also a number of retirement "what-ifs," such as what if my investments lose money or don't meet my expectations, if inflation damages my investments, and/or if I live too long?
Although it might seem like you'd be in good shape if you've managed to build a retirement fund of $200,000 or more by the time you're 65-years-old, you must take into account that this money could potentially need to last you 20 to 30 years post-retirement.
There are a couple of options for ensuring you won't prematurely run out of money. One option is to carefully manage your available assets on your own by only taking systematic withdrawals from your accounts in amounts that would reasonably leave enough to last you the remainder of your life. Another option is to use some of your money to buy an immediate annuity that would provide you with guaranteed payments for the duration of your life. Some decide to combine both of the options and manage their own retirement fund until they feel it's the right time to buy an annuity.
Is an Annuity My Best Choice?
If you're positive that your existing income will sufficiently pay for your retirement expenses, then you might not need an annuity to generate income. Alternatively, if you have retirement expenses that aren't covered by your other retirement benefits, then you might need a monthly annuity payment to help cover all your expenses.
Of course, we rarely have a timetable on how long we'll live. That said, if you have a reasonable expectation to live a long life, then the fact that an annuity benefit will continue for the duration of your life could be very beneficial. An example of a reasonable expectation would be if your siblings and parents lived extended lives. Alternatively, you might not benefit from an annuity if you have indicators leading you to suspect that you might not live long into your retirement, such as being diagnosed with a chronic or terminal illness.
How Can I Be Certain about the Future?
Again, no matter how long you might live, an immediate annuity will ensure that you receive payments for the duration of your life. Even if the insurance company providing your annuity were to fail financially, state insurance usually guarantees your annuity benefits will continue up to your state's maximum amount.
Although most are concerned about outliving their money, some are concerned that they'll die earlier than expected or have too much money tied up in an annuity. An income annuity can be structured in a way that guarantees your benefits continue to your heirs for five, even 10 years after you die.
When Should I Buy?
Some financial advisors recommend you prolong buying an annuity until you are 70 to 80-years-old. The reasoning being that the length of your life expectancy will be shorter as you age and could result in a better income for your deposit. In such a situation, you should be careful that you manage your money in the meantime so that you'll still have enough to purchase your annuity.
How Do I Find the Right Annuity Provider?
The goal is the best price at the lowest risk to you. To determine which companies are safest and the least risk to you, be sure to research their credit ratings. Compile a list of potential providers that have good credit ratings and then compare what income amount each will offer for your deposit.
How Much Should I Buy?
Keeping in mind that certain expenses will decrease and certain expenses will increase during retirement, begin by projecting your expected annual retirement expenses. In other words, you might not be paying for work-related expenses or Social Security taxes, but you might be traveling more or spending more on recreational activities. Once you've estimated your annual expenses, subtract your Social security and/or pension benefits. Your annuity should at least cover the difference between your income and expenses.
* Annuity withdrawals are generally taxed as ordinary income and may be subject to surrender charges, in addition to a 10% federal income tax penalty if made prior to age 59 1/2. The guarantees and payments of income are contingent on the claims paying ability of the issuing insurance carrier.