Annuities

In retirement, a guaranteed income can reduce your stress and allow you a less-panicked approach to investing. With no pension, you may be relying on Social Security as your only assured income. Buying a life annuity can guarantee that extra income, but you lose both control of your assets and their use as your legacy. What’s a solution to this dilemma?

The fixed term SPIA solution
Use a single premium immediate annuity (SPIA). In this case we’re looking at a fixed term SPIA where you purchase the SPIA for an immediate payout, but only for a fixed term – perhaps 5, 10 or 15 years.

The idea is to buy the fixed term ingle premium immediate annuity with only 50% of your savings. The term you choose depends on how much extra assured income you need and what you plan to do with your other 50% of savings. Let’s see some examples for this approach.

New retiree – getting adjusted
Take this hypothetical example. If you’re a 66 year old man beginning retirement with $400,000 in savings but no company pension, you may want to complement your Social Security income with single premium immediate annuity income while you pursue some endeavour for the first 10 years of your retirement. But you don’t want to lose control over your assets for later alternative choices.

As an option, you could purchase a 10 year term single premium immediate annuity that would pay  you $2,084.01 per month to supplement your social security benefits for about $200,000.  This would leave you with $200,000 in savings that you can invest to grow over the next 10 years. With the assurance of the annuity income, you can invest this remainder of your savings more aggressively.

Investing at a hypothetical 7% or 8% growth rate may allow you to recover your $400,000 over those 10 years if things go as intended.  The growth you can reasonably expect will depend on your choice of investment and if that money is in a tax-deferred account. The latter would allow you tax-deferred high income investments.  Or, you could buy a deferred annuity at a guaranteed rate. But, you’re in control of those assets.

Older retiree – worrying about a legacy and living expenses
Let’s consider another hypothetical example. Let’s take an 80 year old woman with $200,000 in savings and a house with no mortgage. She’s drawing down her savings at about $2,000 per month and is worried about depleting her savings and losing her legacy for her children.

She could purchase a single premium immediate annuity for a fixed term – perhaps 10 years - with a fraction of her savings to pay the monthly drain on her savings. And, invest the remainder in a deferred annuity to grow for later use or as a legacy. Her house’s equity can also be a source of income under a reverse mortgage if necessary.

Note: Note that annuities once annuitized cannot be surrendered for value.  Income from deferred annuities is taxed as ordinary income and withdrawals prior to age 59 ½ are subject to a 10% penalty.  Income from annuitization is taxed part as ordinary income and part as return of capital. Any guarantees are based on the claims paying ability of the insurance company. Annuities should be considered long term investments. Annuities are insurance products and subject to insurance related fees and expenses.

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Tags: immediate annuity

This entry was posted on Friday, January 16th, 2009 at 10:42 am and is filed under immediate annuity. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.