The variety and complexity of annuity choices can be confusing. If you’re retired or nearing retirement and want to convert a portion of your nest egg into guaranteed lifetime income, there are two options: an immediate or longevity annuity. Both immediate and longevity annuities, at least compared to other annuities, are relatively simple to understand. Recent research has shown that both annuities are a great way to increase your retirement security.
What is an Immediate Annuity
The concept of immediate annuities (also known as SPIAs, single premium immediate annuities) is straightforward. The insurer will take a lump-sum payment (the premium), and you’ll receive a monthly payout for the rest of your life, no matter how the markets behave. A 65-year-old man investing $100,000 in an annuity will receive approximately $565 per month for the rest of his life. A 65-year-old woman will get around $545 each month, and a couple of 65-year-olds (man and woman) will collect roughly $480 every month, as long as they are both alive.
You might think you can generate the same income by investing yourself. You can’t, unless you are willing to take on more risk. An annuity’s advantage is that it includes not only interest and a return of some of your principal but also an additional “return,” known as a death credit.
Do You Need an Immediate Annuity
However, immediate annuities have their drawbacks. If you die shortly after buying one, you will receive relatively small monthly payments. In other words, if you live a long time, you may be providing mortality credits to other annuity holders. Surrendering your money for the highest monthly payment means it’s no longer available for unanticipated costs, emergencies, or passing on to your heirs. It would be unwise to invest all or the majority of your nest egg in an immediate annuity. If Social Security covers most of your living expenses, you may not even need one.
Immediate Annuities for Women
There is no one-size-fits-all answer to generating retirement income lasting your entire life. Decisions depend on your goals and life circumstances. Splitting your retirement savings between annuities and systematic withdrawals is often recommended for income diversification.
Research shows that annuity income can enhance retirement happiness by providing a steady income during market crises. However, purchasing an immediate annuity involves surrendering access to funds for lifetime payouts. Before deciding, evaluate whether Social Security and pensions cover essential expenses. If they do, consider using savings for discretionary expenses.
What Is a Longevity Annuity
A longevity annuity is similar to an immediate annuity, involving giving a portion of savings to an insurance company for guaranteed monthly payments throughout life. However, payments begin much later, typically 10-20 years after the investment. It serves as a safeguard against overspending in early retirement or underestimating future expenses.
Annuities for Heirs
Immediate life annuities may seem risky, as the insurance company keeps the entire investment if you die shortly after purchase. To prevent this, consider purchasing a “guaranteed duration” to ensure beneficiaries receive annuity payments for 10-20 years after your death.
Is Annuity Income Safe?
While annuities are often considered guaranteed, they aren’t 100% certain. Insurance companies can fail, albeit uncommonly. Verify the financial stability of your chosen company before committing significant retirement funds. Check ratings from agencies like E Policy Review.
Does the State Matter for Annuity Purchase?
Annuities vary by state due to different tax laws and codes. The same product can yield different outcomes in different states. Compare rates, benefits, and features, considering state-specific factors. It’s advisable to choose an advisor with your best interests in mind and who tailors strategies to your needs.
Best Annuity in Florida for Retirement Income
Compare quotes and shop around to ensure the best value from your annuity. A longevity annuity may be worth considering if you’re concerned about insufficient retirement income. E-policy Review Financial Planning can help you achieve your retirement income goals.
Sixty-six percent of Americans worry about outliving their retirement income, and 10% have less than $5,000 in savings. If you haven’t saved enough or fear outliving your savings, E-policy Review can assist you.