Spend money on an annuity, and you could save money in the long run.
There’s an age old theory that says if you can insure yourself through savings, you’re better off than purchasing insurance from someone else. Buying an annuity is essentially buying an insurance policy. So might it be a good idea to fund your own instead of purchasing someone else’s product? In theory, sure. But in reality, it’s not likely to happen the way that you plan.
Annuities guarantee your income no matter how long you live. It is an insurance policy on living long. You could probably self insure against fire or a car accident, however, it is more efficient to buy fire and auto insurance. The same may be true for annuities.
Most investors want the highest return on their investments, obviously, and are always looking out for the best way to secure a dependable retirement income. You can get that, in part, through an annuity. If you go it alone, you’re likely to come up with empty pockets just when you need income the most.
You insure your home and family, so it only makes sense to insure your income against running out.
How Much Can an Annuity Pay?
Unless you have a lot to invest in an annuity product, you’ll only get modest income payment from it. Invest $100,000, and you could get about $500 a month. The key is that with a lifetime annuity or a joint and survivor annuity, you’ll get those payments for life, no matter how long you live.
Joint and survivor annuities have the added benefit of paying your spouse or beneficiary if he outlives you. But you’ll need to shop around. Like any product, some annuities have better terms than others. Retirement expert and author, Walter Updegrave, for CNN Money explains, “Payments can easily vary by 10% or so from one insurance company to another.”
Market volatility is always a risk wen going it alone.
Can you Match That While Managing Risk?
You could match or even surpass those returns through other investments. But to get those returns, you’ll take on more risk. In some cases, a lot more risk. Updegrave says that although the payouts can be nice, they’ll also dry up. An annuity won’t.
The same $100,000 invested in a 10-year Treasury Bond at 2 percent would only provide you with income for about 18 years. Considering the way that life expectancy gets better all the time, you’re likely to outlive your income.
Annuities Give Safe, Dependable Income
Annuities are frowned on by some retirement planning advisors, but that doesn’t mean they’re not good products. They shouldn’t be your only source of income, but they are a sensible addition.
Once you invest, you can’t touch that money again except when it begins to pay out. But while you’re investing and taking on risk in other areas, you’ll have the peace of mind that comes from knowing that some portion of your income will be there for as long as you live.
Self insuring has been a topic for as long as insurance companies have been around. And because an annuity is a form of insurance, it’s natural to wonder whether you could do a better job on your own. And you might, but not without taking on a lot more risk than an annuity.
NewRetirement can help you make sense of all of your retirement planning options, which lets you create a balanced plan for a financially secure future. If buying an annuity is on your radar, check out our annuity calculator and see whether it’s the right choice for your life.
