As the stock and bond markets both begin to really show signs of wear and tear from the global recession, today’s retirees are starting to wonder what else they could honestly focus on in order to move up in the retirement ladder. Or maybe they’re just worried about keeping everything together without really growing their money extravagantly. Isn’t that what we should all be worrying about?
Of course — but why worry when you already know ahead of time that the tools you need are definitely out there? Now is the perfect time to really make sure that you’re thinking about the type of lifestyle that you really want to lead. You don’t want to find yourself being unable to get things done just because you’re a little worried that you’re going to run out of money. As much as we would love to have more money in retirement, we have to make the most out of what we have, and that can be difficult.
Yet it really doesn’t have to be that way at all. There are immediate annuities out there that make sure that you will get a steady monthly check for the rest of your life. You will have to put up a lump sum payment first to the insurer, but then you will get a monthly check after that. However, there are advantages and disadvantages of an immediate annuity that you need to think about.
So let’s take it from the top, shall we?
As mentioned earlier, an immediate annuity is actually different than a deferred annuity. The difference is right in the name, too – immediate means just that. Once the company receives your lump sum, they’re going to start cutting you checks. How big are those checks going to be? Well, that depends on how much you actually deposit. Let’s say that you decide at 59.5 to start easing into retirement — you still have money coming in from work, but you might not want to rely on it forever. You’ve already reached 1 million dollars in retirement savings. If you started early, then this actually isn’t as hard of a goal as you might expect — not with the time value of money on your side.
By the way, we picked 59 1/2 because that’s when you can usually touch all of your retirement accounts without a penalty if you did want to start doing withdrawals. So you have the 3500 from work, 1 million in savings — and we’re going to take 25% of that and put it into an immediate annuity. You’re going to receive roughly $1,300 a month from this annuity. Now, that might not seem like a lot — just $15,600 a year. Yet if you live 25 years after you get the annuity, that’s $390,000 in total payouts. So it’s quite possible to actually get more back over a lifetime than what you put in.
So you would have the $3500 from your job, the $1300 from the annuity, and later down the line you would also have Social Security — the average monthly payout is about 1,200. So where do you go from here?
You work on the systematic withdrawal of your funds as well. We would definitely be remiss if we pretended like the only thing you needed to rely on was your annuity payments, or even Social Security. But remember that you have another 750,000 socked away in savings. So even after you quit your job, you can start withdrawing 3500 from your retirement account — which will indeed keep growing even though you’re taking from it. The whole point of a retirement fund is that you finally get to enjoy it after a while. So why wouldn’t you want to do that?
Yes, the benefits of an immediate annuity are great — having a steady income that lasts as long as your lifetime lasts is a smart idea. In addition to those benefits, you’re also getting a very low-risk. You see, unless the provider of the annuity isn’t financially secure, then you’re going to be just fine. The funds are guaranteed by the assets of the insurer. This means that the stock market doesn’t play a role.
Like with other low-risk investments, the problem that you’re actually going to be facing is that you can get a better return on your money. You can take on riskier investments that have a higher growth potential — but you can also lose it all, and that’s not something that most people really want to deal with. You don’t want to look back on everything that you’ve done and find that you’re losing your money simply because you were chasing the highest interest rate, right? this is where diversification is really important. You can still throw money into an immediate annuity and then chase that higher growth factor. But you’ll always have that nagging point that 25 percent of your money is into something that isn’t going to grow as quickly — but it’s going to be dependable when you need it most.
What about when you’re thinking more or less about inflation? Inflation is really the enemy of good finance everywhere, especially in the investing world. yet there’s not that much that you can do about inflation except see about an inflation rider on your annuity. That way your payments would be adjusted for inflation, giving your money even power no matter how many years go by.
Insurance companies are the ones behind the annuity, but don’t think that you’re not going to find people offering annuities from investment centers, banks, and other arenas.
What about your spouse? Should you get an annuity that covers them too? Well, that depends. It’s actually better to go with the standard single life immediate annuity and then get a life insurance policy for you — that way if you die before your spouse, they can use the proceeds to pay for an annuity of their very own. Getting an annuity that covers you both tends to be much more expensive than breaking things up, so to speak.
What about your heirs? Unless you opt for a plan that pays out for a certain period to your heirs, once you pass on that’s it for your annuity. So if you are worried about wealth transfer, a standard life insurance policy is really the best way to go.
Overall, now is definitely the time to take matters into your own hands and get an immediate annuity — you will definitely be glad that you did!