Annuities

What does it mean?

Put simply, to annuitize is to start taking payments from an insurance annuity that may have been accumulating for some time.  Specifically, you “trade” the accumulated annuity balance for a stream of payments over a specific term of years or life (a life annuity).

An annuity, a policy that is paid into either by lump some or regular payments by the policyholder, and gains value via investment of those funds by the insurance company that holds the policy, in a manner agreed between the two parties, has many terms attached when it is created, and there may be an option to annuitize at a certain point or date set at the start of the insurance annuity agreement.

What happens when I annuitize?

When, and how, the policy becomes annuitized is determined by the rules and terms that are agreed by the policyholder with the insurance company, and these can be varied and dependent on many different factors.

If the policy has a number of different options at which annuitization can take place, then it is up to the policyholder to decide what is best for him or her.  In many cases, if the insurance company does not hear from you, annuitization starts automatically at age 85.

When the choice is made, and one has opted to annuitize, there are a number of ways in which payments can be structured. There are options that involve continued payments within the lifetime of the policyholder, or those that pay up to a certain date (e.g. 10 years) beyond which the policyholder may live, but with no further payments. There are also options that allow a lump some payment of an agreed amount that can only be taken after a certain amount of time has elapsed on the policy, at which point the annuity is said to have matured.

Some annuities allow for the payments to be made to a partner or designated recipient (joint life annuitization), too, and there are other considerations that should be taken into account.

Should you Annuitize?

This is a question that only the policyholder can answer, but if the time has come to draw money from the annuity, some factors should be considered.

If the policyholder is collecting for himself, the lifetime payment option makes a great deal of sense, giving a guaranteed income for the rest of one’s life. The decision to annuitize, whichever option is taken, is not reversible – once done it cannot be rescinded, and the policy is deemed to have matured. (there are a few companies that now allow “commutation” which is the ability to cash in the annuity once it’s been annuitized.  You, the annuitant or owner will pay a stiff price to commute an annuity).

The most obvious reason for annuitizing is to claim the guaranteed payments that come with the policy, and this should be a consideration when deciding whether to annuitize. It may be that the policyholder needs the money in order to live, but in a large number of cases the money is used to set up a further annuity, continuing the process and effectively putting into action a chain reaction of annuities and annuitizing that creates greater income.

An annuity can be a worthwhile for those who like the option to annuitize and thereby shift the responsibility for income to the insurance company.

Learn more.  Get your copy to avoid “Annuity Owner Mistakes“

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Do you find yourself worrying about your finances? While you may think of your situation as unique, you may in fact be among the majority of seniors wtih financial worries.

A recent survey by the publishers of Senior Market Advisor Magazine revealed several seniors’ responses to the question “How much do you worry about money?”

A little                           45%
More than I should        27%
A lot                              20%
Keeps me up at night      5%
Never                              3%
Source: Senior Market Advisor, Senior Survey 2005 (July 2005)

If the same poll were taken today, there would likely be many more who answer that financial worries are at the top of their worry list.

Notwithstanding these statistical findings, financial worries do not have to control you.  A more secure retirement is possible, with smart and prudent financial planning solutions to these common retirement worries:

Retirement Savings Shortfall
Upon reaching retirement, some seniors are surprised to discover that their retirement savings will come up short–an obvious source of financial worry. Instead of pursuing leisure activities, they find that they must curtail their spending habits in order to make their savings last. However even in retirement, you can put your savings to work for you with investment strategies that are designed to help you achieve your growth and income objectives. For example, do you find that your investments are heavily concentrated in CDs and bank account deposits?  Although these investments are often a very good source of liquidity and are insured by the FDIC, an over concentration in these safe investments could expose your portfolio to inflationary risks as they simply don’t pay enough interest. 

Loss of Investment Value
If you’ve owned stocks, recent problems do not get any worse to cause financial worry. Unfortunately, market corrections are a fact of life and can show up at any time. There are things that can be done to help you weather these storms: 
1) diversifying your portfolio,
2) rebalancing your holdings so that stocks never exceed a pre-determined percentage of your portfolio, and
3) following asset allocation strategies designed to reduce your exposure to market risk.  Although asset allocation does not guarantee against the risk of loss in a declining market, it can help reduce the overall volatility of your portfolio. Has your portfolio been reviewed lately? If not, now might be a very good time to do this.

Another key is divide your retirement savings into baskets.  Your most conservative pot, money market and CDs is money you will use in the next 3 years.  The next pot, maybe bonds and preferred shares are to be used in the next 3to 6 years. The next pot, say balanced mutual funds, in the next 6 to 9 years, and stocks or equity funds, to be used in 10 years or more.  Using this approach, even when the market does decline, your stocks have 10 years to recover and won’t destroy your retirement income planning.

Annuitize Your Savings
This is a common worry among many seniors, but one with practical solutions. For instance, buying a fixed deferred or immediate annuity with lifetime income guarantees could help to provide you with a reliable and steady source of cash flow for your retirement.

Annuities are long-term investments designed for retirement purposes. Withdrawals of taxable amounts are subject to income tax and, if taken prior to age 59½, a 10% federal tax penalty may apply. Early withdrawals can also be subject to surrender charges. Annuity guarantees are also backed by the claims-paying ability of the issuer.

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