The Real Scoop on Lifetime Annuities: Is This Type of Insurance Right for You?

Depending on your perspective, annuities can be loved, poorly understood, and even reviled. Some people think they are a great way to guarantee income in retirement. Other people think of them as a terrible investment. So what’s the real scoop on lifetime annuities?

Are annuities a sweet treat? Or, a drippy mess? Get the real scoop.

They’re great. Dangerous. A scam. Safe. You could lose big time. Offer peace of mind. Too confusing and complicated.

Any of those assessments might be true under certain circumstances. But what’s important to understand is that there is no single type of annuity. And, they aren’t going to be right for everyone. Annuities can’t be lumped into any single category – good or bad – because of all the variables and your individual needs and values.

What is an Annuity?

An annuity is an insurance product. In exchange for a lump sum of money, you purchase guaranteed income, a paycheck that will last as long as your annuity contract specifies.

What’s a Lifetime Annuity?

With a lifetime annuity, you pay an insurer a lump sum of money. In return, the insurer gives you predetermined payments beginning at a set date and lasting throughout your lifetime, no matter how long that turns out to be.

With this arrangement, whatever you have invested in the annuity guarantees you a certain amount of income. And it’s exactly the payout that was promised when you bought it. If the economy goes up or down, your payments stay fixed.

In this way, annuities are a safe, dependable income that won’t run out for the rest of your life. Sounds good, right? Yes and no. It all depends on you, your values, resources, and goals.

Is a Lifetime Annuity Right for You?

As noted above, it all depends. Review the questions below to assess if an annuity is right for you.

How Risk Averse Are You?

Lifetime annuities, particularly products with fixed income (income that does not vary with market returns) are a very low risk product.

You are, in fact, guaranteeing a predetermined amount of income for your lifetime.

If you are risk averse, then a lifetime annuity may be right for you.

Do You Want to Trade Income Security for a Lower Return on Your Assets?

When you buy an annuity, you are prioritizing income security over higher asset returns. For some, it is a desirable trade. Others find it an intolerable cost.

How Much of Your Retirement Income Do You Want to Be Guaranteed? Guaranteed for Your Lifetime?

Guaranteed income is income you can rely on no matter what. You know how much you will get no matter what is happening in the economy. Guaranteed lifetime income is income you can rely on to last as long as you do.

Social Security and some pensions are guaranteed lifetime income. Income from a job or side gig, passive income, dividends, and withdrawals from savings can be variable and not guaranteed.

Some people want a certain amount of their income to be guaranteed. If there is a gap between your desired spending, or perhaps your non discretionary spending, and guaranteed income from Social Security and other guaranteed sources such as pensions, then an annuity might be a good solution for you.

Use the NewRetirement Planner to assess your retirement income needs and run scenarios with or without a future annuity purchase.

Do You Want a Reasonable Way to Cover the Potential Costs of Long-Term Care?

Long term care is expensive, but so is long term care insurance. Some people who want to plan for long term care costs turn to a deferred lifetime annuity. Instead of buying insurance, you invest in a lifetime annuity that will begin at a future date (around the time when you think you might require long term care).

The annuity payments cover long term care costs (if you in fact require the care) or are used to supplement income (if you do not require care).

Use the NewRetirement Planner to assess this strategy. 1) Select annuity as the way you want to cover future long term care (the system will automatically factor the costs into your plan). 2) Model your desired deferred lifetime annuity. 3) Assess your future cash flow and net worth.

Are You Worried About the Costs of a Longer Than Average Lifespan?

Just like you might want to buy an annuity to cover long term care costs, you may also want to consider an annuity to cover a longer than expected lifespan.

You don’t know how long you are going to live. And yet, you need to plan to make your money last as long as you do. Some people use annuities to guarantee income, especially income at the end of their life, to reduce the possibility that they end up penniless.

This Lifetime Annuity Calculator has an interesting feature that will compare the cost of your annuity to the total income you will receive if you live until age 80, 90 or 95.

Can You Tolerate Complexity?

Insurance products are complex and lifetime annuities are no exception.

Annuities come in an immense variety of flavors and selecting the right combination of riders can be confusing at best. And, the fact that annuities are usually “sold” can make finding advice about these products difficult.

When you purchase an annuity, you’ll be faced with myriad decisions, including:

  • When you want payments to start
  • What the term will be (a specific number of years or your lifetime)
  • Will benefits extend to your spouse or other dependent (if applicable) after your death?
  • Do you want inflation protection (your paycheck will increase with inflation)?
  • Is return of premium desired? (Do you want to guarantee a certain return on your initial investment?)
  • And more…

If you can handle the complexity and are reasonably competent with financial decisions, then an annuity may be reasonable.

How Much Do You Have to Invest?

Purchasing an annuity requires a lump sum to invest. And, you want to make sure that you can invest enough to cover your income needs.

You can use an annuity calculator to see how much income your investment will buy.

Is Inflation a Concern?

An annuity with inflation protection will guarantee that your income increases at a predetermined percentage. This can offer peace of mind. However, inflation protection increases the cost of an annuity.

Use this Annuity Calculator to compare the costs of an annuity with or without inflation protection.

Be Sure to Consider an Annuity Purchase in the Context of Your Entire Financial Plan

Investment decisions should not be made in a vacuum. An annuity may be a missing part of a puzzle for some or a game piece that is simply not needed for others.

Before deciding whether or not you need an annuity, make sure that you have a great understanding of your overall retirement plan. What do your finances look like at your retirement age?  What will you have left near the end?

The NewRetirement Planner is a tool that can tell you how much savings you need now.  It can also tell you if you could use additional retirement income (like income from an annuity).  You can put in your existing information and then try out different scenarios. It can help you discover for yourself what financial strategies will give you the secure retirement you seek.

NewRetirement can help you create the best retirement plan that you can get.

NewRetirement Planner

Do it yourself retirement planning: easy, comprehensive, reliable

NewRetirement Planner

Take financial wellness into your own hands and do it yourself retirement planning: easy, comprehensive, reliable.

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