Longevity Annuities Can Be A Good Deal For Seniors But Not Many People Buy Them
- Longevity annuities pay monthly income for life, generally starting between age 75 and 85.
- They’re among the best financial deals for seniors who are worried about outliving their savings due to old age, according to retirement experts.
- However, they’re not frequently purchased largely due to psychological hurdles.
American life expectancy is trending up and that creates more financial risk for retirees, who must make their nest eggs last a longer time.
An average 65-year-old today will live another 20 years, about six years more than in 1950, according to the Centers for Disease Control and Prevention.
Seniors can take measures to reduce this “longevity risk,” such as working longer and delaying Social Security.
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They also have a type of annuity at their disposal a longevity annuity that is among the best financial deals for seniors who worry their money won’t last, according to retirement experts. However, they’ve been little used to date.
“It’s contingent on living a long time,” said Wade Pfau, a professor of retirement income at The American College of Financial Services. “If you live a long time, you’ll get the most bang for your buck that way.”
Cons To Pension Drawdown
Are There Disparities Between The Potential Sources Of Retirement Income And Retirement Expenses
Assess projected retirement expenses and unexpected costs against retirement savings and portfolio investment mix. Retirement expenses may exceed income in retirement, in which case an annuity might be useful.
In the event that you outlive your savings, an annuity may provide some protection. By paying into an annuity, you receive a guaranteed income stream from the insurance company. In some types of annuities, the guaranteed income continues throughout the annuity owners life despite market fluctuations.
You may be able to apply for an annuity to help fill gaps in your retirement income plan with the help of a financial professional.
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Can You Continue Contributing To A Pension If You Purchase An Annuity
If youre planning to take your tax-free lump sum, set up a guaranteed income from an annuity and make further contributions into the same pension or another one, you need to be aware of the pension recycling rules.
These are designed to prevent people from getting further tax relief on contributions where they have already benefited from tax relief.
You could be affected by the pension recycling rules if you plan to use some or all of your tax-free lump sum to significantly increase contributions to a pension.
Find out more about pension recycling from HMRC
If youre considering reinvesting your tax-free lump sum into a pension, consider speaking to a financial adviser. They can help you look at whether putting the money back into a pension is the best option for you and help you avoid any pitfalls.
Fixed Vs Variable Annuity: Which Should You Choose
While both variable annuities and fixed annuities offer benefits, there might be cases where one is more appropriate.
Fixed annuities are a better choice for someone who has a low tolerance for risk, says David Clausen, a certified financial planner and wealth management advisor with Northwestern Mutual. In todays low interest rate environment, we are seeing people have a difficult time constructing a bond ladder that provides them the income they need without taking on significant credit risk or burning through principal.
For those willing to tolerate more risk in their retirement fundsor those who want to save a lot for retirementvariable annuities might be the right choice.
Variable annuities can be a viable solution for those who are willing to stay invested in stock-like markets, but need guaranteed income, living benefit or death benefit tied to their annuity to help them achieve their financial goals, says Brady Kirkpatrick, a CFP with CenterPoint financial Group, Inc. For example, some variable annuities have a living benefit attached to them where you can still take some income from a minimum benefit if the markets are down significantly, preventing you from withdrawing principal.
When deciding between these types of annuities, though, focus on your own tolerance for risk and what blanks you need to fill in in your retirement plan.
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Fixed Annuities Vs Variable Annuities
While fixed annuities typically guarantee a minimum rate of interest and minimum periodic payments, variable annuities fluctuate with the market and may be made up of a variety of investments, such as stocks, bonds, and mutual funds. Specific investments of a variable annuity are defined by the prospectus. Consumers should read and understand the prospectus, and the volatility of each investment listed in the prospectus. Investors should ask their broker to explain all terms and conditions in the prospectus, and ask questions about anything they do not understand. Fixed annuity products may also carry risks, such as long-term deferral periods, barring investors from accessing all of their money.
Tax Implications On Annuities
You’ll have to report the money you get from an annuity as income when you file your taxes. You may have to pay tax on this money. The amount of tax you may pay will vary depending on the product. Taxes will be different if you buy your annuity using registered savings versus non-registered savings.
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Are Annuities A Good Investment
You may already take advantage of a financial product such as a 401 or an individual retirement account to put away money for retirement. Another investment option for retirement is something known as an annuity. An annuity is an insurance contract that pays money to you either now or sometime in the future.
But is an annuity a good retirement investment? Here, we review the pros and cons of putting your money into an annuity.
You Will Receive Regular Payments
The most basic feature of an annuity is that you receive regular payments from an insurance company. These payments provide supplemental income during your retirement, and can help if youre afraid that you havent saved enough to cover your regular expenses. Keep in mind that the value and number of your annuity payments will vary depending on the type of annuity you have and the terms of your contract.
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Tips For A Wise Annuity Buyer
Investing a lump sum with one of our best annuity companies today will lead to a steady monthly cash stream in the future. As with any investment, it is essential to be informed and to understand the costs and the income. Wise investors research the market, annuity companies, types of annuities available, benefits and risks as well as the fees and commissions. The ins and outs of some annuities are so intricate that even the most seasoned investor can find themselves scratching their head wondering what the best choice is.
Using Our Calculator To Find Out Your Annuity Income
Annuity income results are available on our calculator for ages 55-85.
Once you enter your age and pension pot amount, we’ll show:
- The amount you could take for your 25% tax-free lump sum.
- The amount remaining in your pension pot after taking the lump sum.
- An estimated annual income based on the amount left in your pension pot.
As well as results for our annuity, which guarantees an income for life, you can also see results for our Fixed Term Retirement Plan and Cash-Out Retirement Plans. These offer incomes over a fixed term. You can use the calculator to see the impact of different terms on your annual income.
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Seniors And Investments Frequently Asked Questions
While no investment is ever entirely safe, savings accounts and Treasury securities are the most secure places to invest, though their returns will be relatively low.
Amie has been writing about senior care products and services for the last decade. She is particularly passionate about new technologies that help improve the quality of life for seniors and their families. Seeing her parents and grandparents age made Amie ask herself, Would this be good enough for my loved ones? In her spare time, Amie enjoys outdoor adventures and spontaneous road trips. Learn more about Amie here
What Is Lifetime Income
When we talk about lifetime income at TIAA, we are referring to payments in retirement that can help cover essential living expenses.
Just as you may have built a diversified savings plan for retirement, you can apply the same strategy to pay yourself in retirement. Diversifying your income sources can provide you with both guaranteed lifetime income and also income growth potential.
Building an “income floor” is one effective method for creating a lifetime income stream. By identifying how much it takes to cover your everyday billsand ensuring that is metyou can focus on enjoying your life in retirement. Below are three common strategies:
- Social Security, the federal government’s retirement benefit, can provide a portion of your income floor. To maximize your monthly payments, consider waiting to claim your benefits at least until your full retirement age. If you are married, explore your options together to make the most of spousal benefits.
- Traditional defined benefit plans provided by employersalso known as pensionscan go a long way, but they are becoming a thing of the past. At last count, pensions were offered to less than 17% of American workers.2
- Annuities are insurance products designed for retirement and other long-term goals. They can help bridge gaps in the incomeOpens in a new window you need to cover everyday expenses.
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Who Should Invest In An Annuity
Annuities are best suited those who have maxed out tax-deferred contributions to 401 plans and IRA plans. The Internal Revenue Service defines the maximum allowable contributions to pretax 401 and profit sharing plans, and both Roth and traditional IRAs. According to the Insurance Information Institute, there are no limits on the amount that you can invest in an annuity.
IRA and 401 accounts have hardship withdrawal or loans features if you need money for medical care, education and some other expenses. An annuity is not as flexible once you make a deposit, the contract locks into a surrender period of two to over 10 years where you will pay fees along with a tax penalty if you withdraw any of the money.
Annuities carry annual fees, transfer fees, expense risk charges and other fees. Investor.gov explains more about annuities fees with information from the Security and Exchange Commission . Be prepared to compare the expenses of retirement accounts or see an independent financial planner for guidance.
There are a few types of annuities, like tax-sheltered, singled life, or joint. Low-cost fixed or variable annuities are often the best option as a part of a retirement portfolio. Monthly payments will fluctuate with a variable annuity, while fixed annuities pay out one monthly amount. No annuity is protected or insured, but they are considered safe investments.
Possibility Of An Insurer Defaulting
Annuities are guaranteed by the insurance company who issues the contract. While there have not been a lot of defaults on annuities, this can happen. The backup to the insurance company is the guaranty association in your state. It is a good practice to check on the financial solvency of an insurer before investing in any annuity contract.
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Are Annuities Suitable As Investments For Elderly People
As an elderly persons principal and interest rate are protected, fixed and fixed indexed annuities deserve consideration. In addition, beneficiaries can avoid probate by receiving a death benefit.
Moreover, nursing homes, assisted living facilities, and home health care expenses are a fraction of the cost when long-term care annuities are purchased. And, for married couples with an elderly spouse who needs long-term care, Medicaid annuities can be an excellent investment. This is because the married couple can still have assets while drawing Medicaid benefits.
As for variable annuities, they might not make sense for the elderly. Mainly, this is because they can lose money if the market performs poorly. And, due to the fact that the contract owner must surrender control over their money, immediate annuities also dont make sense.
Is Now A Good Time To Buy An Annuity
Important information: The value of investments can go down as well as up so you may get back less than you invest.
BACK in the day you would have hit retirement and used the proceeds of your defined contribution pension to buy an annuity, guaranteeing you an income for the rest of your life. But in April 2015 it all got a bit more complicated.
As Spiderman might have said in the circumstances, with choice comes great responsibility. Post-2015 the thorny issues of a) whether to buy an annuity and b) when, if at all, are questions for most people pondering how to fund their retirement.
Annuity payments rise when interest rates are high and as you lock in the rate the day you buy an annuity, right now, with interest rates on the way back up and likely to head higher yet, anyone who has been considering an annuity, might very well be asking, is now the time to buy one?
Historic data shows that ten years ago, back in January 2012, a 65-year-old would have been able to buy an annual income of £5,860, with no inflation protection, with every £100,000 in their pension pot. Currently a 65-year-old buying on the same basis would have been able to buy an annuity giving them £5,218 a year.*
Current annuity rate examples of annual income bought with £100,000
*Annuity rates as of 16.2.22 based on a male, aged over 65 in good health. Joint life – based on female dependant aged over 62 in good health.
24 June 2022
Assess your annuity options
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What Is A Good Monthly Retirement Income
Median retirement income for seniors is around $24,000 however, average income can be much higher. On average, seniors earn between $2000 and $6000 per month. Older retirees tend to earn less than younger retirees. It’s recommended that you save enough to replace 70% of your pre-retirement monthly income.
Immediate Vs Deferred Retirement Annuities
With an immediate annuity, you pay the insurer a lump sum and start collecting regular payments right away. Some older adults, for example, may choose to put some of their nest egg into an annuity once they hit retirement to ensure a regular income stream.
A deferred product, by contrast, is more of a long-term tool. After paying in, you dont collect until a specified date. Before you get to that date, your money has the opportunity to either accrue interest or benefit from market gains .
Theyre complex and hard to understand.
Fees make annuities more expensive than other retirement investments.
Net returns on withdrawals are taxed as ordinary income.
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Is An Annuity Right For You
Annuities have modest returns that wont net much more than a CD or a traditional investment account. But they can be preferable to clients who dont want to invest their own money since the insurance company invests it conservatively on their behalf. They are also an ideal choice for someone who has already maxed out their pretax retirement account and is looking for a secondary account. Additionally, they’re a particularly good choice for conservative investors who are not comfortable putting their savings at risk in the stock market.
With the average lifespan of a 65-year-old hovering at 84.3 years for a man and 86.7 for a woman, Minches said income annuities can put a retiree’s mind at ease about outliving their savings since they provide pension-like income that lasts for as long as youre alive. They are also protected from market crashes as the insurance company will absorb the losses.
Whereas life insurance is important to protect your family from a premature death early in life, annuities are important to protect your family from the expenses of an unexpectedly long retirement. The bad rap annuities get, says Minches, comes from a few different factors.
The income annuity con: Its illiquid, says Minches. You cant change your mind and get your money back. Much like a pension, you just get a check every month.
Looking For A Source Of Guaranteed Lifetime Income In Retirement Retirement Annuities Can Help Meet The Challenge
There’s so much to look forward to in retirement, from travel to pursuing personal passions and spending more time with your family and friends. But feeling financially confident can be challenging at any age, and especially when thinking about how to ensure you have sufficient income to get toand throughretirement.
Retirement savings are vulnerable to a number of risks: Market volatility could lower your investments’ value, inflation could put a dent in your purchasing power over time, cognitive issues could make it harder to handle retirement income withdrawals, and living longer than expected could mean you outlast your retirement accounts. Annuities, a type of retirement investment that can be used to provide guaranteed income for life, can help with all of those risks.
And that’s what most people saving for retirement want: A recent TIAA survey found that 69 percent of the people saving for retirement on the job ranked guaranteed income for life as one of their top two goals for their workplace plan.1
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