Annuities

There’s a type of annuity that pays you more if your health profile is not good.  This may sound strange, but here’s how it works:

SPIA, which stands for Single Premium Immediate Annuity (also referred to as health adjusted immediate annuity), has long been a popular investment for obtaining a fixed income which cannot be outlived (income for life).  With the income for life option, the issuing insurance companycalculates the size of your monthly payment based on standard life expectancy tables, based on an analysis of your health.  Once calculated at the beginning, you continue to receive the same monthly amount, regardless of how long you live.  It’s almost like getting a second social security check.

companies take into account your individual health condition and use that information to calculate your life expectancy.  If your health records indicate conditions that could lower your life expectancy, this is factored into the monthly payment you receive and increases the monthly payment.  You then receive this fixed monthly amount no matter how long you live.|

Take this hypothetical example.  A man age 70 decides to obtain a SPIA.  He deposits a $100,000 premium and based on his standard life expectancy of 16 years, his monthly payment is $871.05 (a 10.4% annual payout rate).  He will receive this fixed monthly amount regardless of how long he lives.  However, if he has a negative health profile and the insurance companies calculate his life expectancy at only 10 years, his monthly payment will jump to $1393.68.  Because of the negative health history, this annuitant receives more income for life.

SPIAs have been most popular with single individuals who are not concerned with leaving an inheritance.  That’s because, once the initial premium is paid, the SPIA cannot be surrendered for value.  Rather, you receive a fixed monthly income for life.  For those people who like the idea of increasing their monthly income and do want to leave funds to heirs, remember that you would use only a part of your assets for a SPIA and other assets can be designated for heirs.

If you’ve been relying on other sources for tax-sheltered income such as municipal bonds, you may find that an SPIA will increase your monthly tax sheltered income.

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Could underestimating your longevity mean you’ll run out of retirement money?

At age 65, the average life expectancy is 81.8 years for a man and 84.8 years for a woman. At age 75, the average life expectancy is 85.5 years for a man and 87.6 years for a woman. Note that as you grow older, you’re expcted to live longer!  With recent advances in medical science, it’s no longer a stretch to think that you could live to be 100. In fact, the US Census Bureau projects that by 2050 there will be nearly one million centenarians.

No one wants to die sooner, so that’s great news. The problem: If your retirement plan doesn’t recognize the possibility of a long retirement, then you could potentially outlive your money. But read on for a solution.

Consider the following hypothetical example. Assume you’re 64 years old and earn $60,000 per year. You plan to retire next year at age 65. You’ve accumulated $1,000,000 in retirement savings, which you think will return a hypothetical six percent per year throughout your retirement. And, you have a $60,000 annual retirement need (excluding Social Security). If you have a 15-year retirement from ages 65 to 80, you’ll have no shortfall in retirement funds; in fact, you’ll end up with almost $696,000 to pass on to your heirs. On the other hand, if you have a 30-year retirement from ages 65 to 95, you’ll run out of money at age 83 as the table below illustrates. Of course, this example  is hypothetical and for illustrative purposes only. It is not meant to represent the performance of any particular product.

Source: Burling Bank. Assumes $1,000,000 in retirement savings has already been accumulated; another $60,000 is added. The money grows at a hypothetical 6 percent pear year; $60,000 (in today’s dollars) in withdrawn each year. This example above is hypothetical and for illustrative purposes only. It is not meant to represent performance of any particular product.

Because the risk of outliving your funds is real, annuitization may be an option.  Annuitization is the process of converting your assets into an income stream.  For example, maybe you plan to leave your heairs$250,000.  You could turn that $250,000 into an income stream you cannot outlive with an immediate annuity.  For example, a femaelage 70 could invest $250,000 into an immediate annuity and get $1765 a month for life – an income she cannot outlive.  To see the amount you can receive, use the immediate annuity calculator.

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