A consistent income stream during retirement is a major consideration for many seniors. Immediate annuities provide a consistent income stream for life in return for investing a lump sum. While annuities haven’t been popular in the past, interest in them is steadily increasing as the tremendous number of baby boomers reach retirement age.
Understand immediate annuities and make an informed decision:
- Annuities are an insurance product. The insurance company invests the premium. In exchange for a single deposit, you receive a monthly payment. The funds of account holders that die sooner than expected help to fund those that live longer. The monthly payout is fixed.
- To get a rough idea of the dollar amounts involved, if you’re 65-years old and invested $100,000, you could expect a monthly payment of roughly $550 per month.
- Understand that you no longer have access to your premium money. Once that money is paid to the insurance company, you can’t use it for any purpose. Any unforeseen expenses will have to be handled by other means.
- Your heirs cannot inherit the premium money or the payments. The money used to pay the premium is gone forever. Your heirs won’t inherit anything from your investment in an immediate annuity.
- There’s a risk you won’t get your money’s worth. Should you fall off a cliff the day after making your premium payment, neither you nor your heirs will ever see a benefit from your investment.
- You and your spouse can be on the same plan. You and your spouse have the option to receive payments as long as one spouse is still living. The monthly payout is less, but the payments will continue to the living spouse after one spouse dies.
- The return on your investment is very low or quite high, depending on your perspective. If you receive $550/month on your $100,000 investment, that’s a 6.6% return. That’s very high for a guaranteed return. However, you also lose your principal. If you live to be 85, your return is only $32,000 from a $100,000 investment. That’s an annual compounded return of less than 1.5% after subtracting your premium.
It’s important to consider the math before making a final decision regarding immediate annuities. Immediate life income annuities provide guaranteed income throughout your retirement years, but leave nothing to your heirs.