Annuities Are Smart Purchases

Creating a long-term plan can feel overwhelming, but it doesn’t have to be. Making the shift from regular paychecks to living off retirement income requires careful planning and money management. One of the toughest decisions many people face is how to invest wisely for retirement. Long term investment decisions can have a large impact on how you can afford to spend your retirement, when you can financially retire.

Annuities are smart purchases for a portion of the nest eggs of people who don’t have old-fashioned pension plans. Many retirees are in a terrible bind. The stock market’s volatility scares them, but conservative investments like money-market accounts or bank certificates of deposit yield almost nothing right now. 

Often people that use CD or bond interest as a supplement for their retirement income, find that it simply doesn’t cover all their needs. If they dip into the principal, then the interest is lower and finally they experience a growing shortage every month.

Last month the White House’s Middle Class Task Force recommended immediate annuities as a way to reduce “the risks that retirees will outlive their savings.”

A retirement annuity allows you to maintain the same income level regardless of the fluctuations in the prevailing interest rate. An annuity makes sense because:

• Annuities offer guaranteed income for whatever period you choose up to a lifetime.
• Annuities are tax deferred retirement investments.

A retirement annuity can supply a steady stream of income to supplement your social security and provide for extra travel, dinners out and visit to the children who moved away.

Let’s use an example of a 65-year-old man who buys a $100,000 annuity that pays $7,500 a year and he lives 20 additional years, his life expectancy. Because there isn’t a return of principal at death, the equivalent yield on the investment is 4.48%. (Some of the payment is regarded as a return of principal, only a portion of it is subject to income tax.)

However, the math continues to be much more favorable if our 65-year-old lives longer. For example, If he dies after 25 years, the effective yield rises to 5.87%; at 30 years, 6.61%.

Since investors worry about dying prematurely, insurance companies sell immediate annuities that guarantee the annuity payments will continue for a set number of years. However, you will get a little lower annual income payments—$7,291 for our hypothetical 65-year-old buying an annuity with 10 years of guaranteed payments.

You also can protect your annuity investment by buying from different carriers and staying within the coverage limit available in your state. In the event of an insurer’s insolvency, industry-backed guaranty funds provide at least $100,000 for such annuities; visit www.nolhga.com for links to your state association’s Web site, where you can find the exact limit in your state.

Summary:  Outline what you need in a product before you begin to shop for a retirement annuity. Do you need to have a monthly income? Do you want a product that keeps pace with inflation? Do you simply want tax sheltered growth but don’t want any risks? Once you decide on the type of needs you have, begin to compare retirement annuities. It helps to have the advice of a trained CapitalManagers annuity specialist when you make your final decision.