The Real Scoop on Lifetime Annuities
Here are four ways to tailor a lifetime annuity that gives you guaranteed income for the rest of your life (with as few of the drawbacks as possible).
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 entire life.
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 the same. In this way, annuities are a safe, dependable income that won’t run out for the rest of your life. But, of course, it’s not that simple.
Here are four very important considerations for your annuity investment.
1. Don’t Lose Your Initial Investment
One of the biggest drawbacks of an annuity is losing your initial investment. If you die before your investment is depleted, the balance goes to the insurer. There’s nothing left and no continued payments to your spouse.
The work-around is an annuity that continues to pay your spouse if you die early. You could choose payments that stay the same as they were with both spouses living. Or you could choose payments that reduce by a certain percentage at your death.
2. Plan for Beneficiaries
Any annuity could terminate at your death, which leaves nothing for your heirs or beneficiaries; that’s one of the most negative characteristics of these policies. But always remember that modification possibilities abound, and you aren’t stuck with a base plan.
At your request, your annuity could grant a payment to your heirs and beneficiaries at your death, as long as your initial investment hasn’t been depleted. If you live a long and very healthy life, as one would expect, your initial investment might be gone before you die. You would continue to receive your payments for life. But the initial investment would have nothing left for additional payouts.
3. Account for Inflation
What sounds great in 2020 might not be as great 20 or 30 years from now. Inflation is a bear, and it can make your once bountiful payments seems downright skimpy. With a base annuity, you have guaranteed payments for life. And that means exactly what it says: the payments don’t decrease, but they don’t increase either. Unless, of course, your annuity adjusts.
Plus, your annuity can offset the effect of inflation if you choose the right policy. You can have payments that gradually and automatically increase year after year. Or you can choose one that adjusts based on the policy’s interest rate, or even choose a policy that lets you adjust payments as you go.
For every drawback, there’s a possible solution. But one drawback holds firm no matter what you do: Workarounds aren’t free. Expect an annuity that gives you more freedom to also cost you more. You might need a larger investment, or you might have to agree to lower payments. Everything comes at a price, especially security.
Annuities aren’t the big bad demons that some financial planners claim. But neither are they the best way to plan your retirement. Like anything else, they’re a tool. And as such, they can be a valuable part of your overall retirement portfolio.
4. Consider All Investments as Part of a Holistic Retirement 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 Retirement Calculator 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. If you’re interested in annuities and don’t know where to start, check out our Annuity Suitability Test. With a few short questions, you’ll learn whether this stable type of retirement income might be worth looking into.