Buying Annuities To Guarantee Income In Retirement
12 August 2006I’ve recently been discussing the problems that hit people’s financial planning when they don’t account for the fact that they might live well into their eighties. I asked how long you should assume you’ll live in retirement, as well as how technology might increase your life expectency, requiring you to save more.
Now, from Kiplinger’s, comes an interesting article on using annuities to plan for this contingency and guarantee yourself a set income for life. Annuities are agreements with an insurance company where you pay a certain amount to them up front, and they agree to pay you a certain amount per year until you die. There are all kinds of different variations and specialized kinds of annuities depending on what your circumstances are.
The article mentions several quirky annuity options that have been created in recent years - one of these I especially liked was this one:
Running out of money is rarely a big concern in the early years of retirement. To protect the oldest of the old, a few companies are offering annuities that act more like insurance. You set aside a small amount of money when you retire, or even earlier. You get your first checks when you reach a designated age.
For example, if you make a one-time $25,000 investment in Metropolitan Life’s basic Retirement Income Insurance fixed-rate annuity at age 60 and are still alive at age 85, you’ll receive $24,300 a year for the rest of your life. If you invest at age 55, you’ll receive $38,000 a year starting at age 85.
But if you die before age 85, you don’t get anything.
So in essence, you’re insuring yourself against the chance that you’ll outlive your retirement funds. I think this is a VERY smart option to consider because it essentially allows you to safely plan for a retirement over a fixed period of time. If you invest $100,000 at age 60 in this kind of annuity, then you’ll have a comfortable, $100,000 a year retirement if you live to age 85. Even if you live to be 100, you’ll still make that much per year. You can then plan to spend all the rest of your savings over the 20 years between 65 and 85.
The downsides: it’s not as good an option for a couple, because if one of you dies, you lose the income tied to them staying alive. On the other hand, it takes less money to support one person than two.
It also won’t keep up with inflation. But if you plan ahead and buy a guaranteed income of more than you need, you won’t have to worry about that, either.
The article gives some other good advice as well: you receive higher payouts on an annuity if you’ve got a serious medical condition (because you’re more likely to die). That makes it a much more attractive option because you can guarantee an income for a lot less.
You can also just get an annuity for life at age 65. It’s a pretty simple plan - cash out all your retirement funds and put it into a lifetime annuity. Consider buying one of the “in case I live to 85″ annuities, too, to give you a boost that will counteract inflation. You can get pretty good rates - the article quoted one couple in their seventies as getting 8 percent, or 8,000 per year on a $100,000 investment. Not a bad way to make sure you retire comfortably and safely.
Discuss this on the Free the Drones Retirement Forums here.
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August 12th, 2006 at 5:16 pm
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