Create a Personal Pension with an Immediate Annuity
People are living longer. That means retirement savings must last longer. The average 65-year-old will live 17.8 years. You may live much longer. Concerns about outliving savings are realistic. Recent events have stoked those fears. You may have seen the value of your stock portfolio fluctuate wildly in bull and bear markets. Even a bond portfolio can lose value when rates rise. If you're seeking sanctuary in money market funds and certificates of deposit you have seen your interest income evaporate. So what's left for you to do? One solution, if you don't already have an employer-provided pension plan, may be to buy an immediate annuity, essentially creating a "personal" pension plan for yourself.
What is an Immediate Annuity?
When you buy an immediate annuity, you give an insurance company a chunk of money in exchange for a guarantee that you'll receive a monthly check either for the rest of your life or for a specified period (or for both).
There are many issues to consider before you buy an immediate annuity. Most advisors say to only use a portion of your retirement savings to buy immediate annuities because once you buy one, you're locked into the agreed-upon monthly payment amount for life. This is true of so-called "fixed" immediate annuities. If inflation boosts your expenses, the "fixed" immediate annuity will not keep up with your increasing costs.
An immediate annuity can cover one or two people:
1. With a Single Life annuity you (as the annuity owner) receive payments for as long you live.
2. With a Joint and last survivor annuity, generally purchased by married couples, payments continue to you as long as you or your spouse is alive. You can choose a reduced payment for the surviving spouse, which increases the payment amount while you are both alive.
3. With a Term Certain or fixed period certain annuity, payments are guaranteed for a specific period of time, ranging from 5 to 30 years. If you die during the period, your beneficiaries will receive payments until the term expires. A fixed period may also be added to a single life or joint life annuity.
Should You Buy an Immediate Annuity?
You can consider buying an immediate annuity if you want a regular source of income and you're extremely risk-averse. Financial planners say most retirees can make their savings last until they die without buying an immediate annuity but that usually means leaving at least some of your money in the stock market. If you can't bear the fluctuations and risk, an immediate annuity may offer a way to transfer the risk to an insurance company.
You can consider buying an immediate annuity if you expect to live for a long time. If you're healthy and come from a long line of octogenarians, a lifetime annuity may pay off.
If you're convinced an immediate annuity is right for you, there are several Internet Web sites that let you get free quotes. One of the easiest to navigate is www.immediateannuities.com.