Income in retirement is a first concern of anyone approaching retirement. Most government employees, and some company employees, will have a pension — a guaranteed monthly income for life, often with survival rights for spouses. However, many others will have investments accounts that will need to be converted to income, whether retirement accounts through their place of employment (most typically, 401[k] accounts), Individual Retirement Accounts (IRAs), or other investment accounts.
As long as you’ve had a steady paycheck coming in with which you can cover living expenses, these accounts have been allowed to grow on their own. However, now that you’ll no longer have that paycheck, you’ll need to convert these savings accounts into an income stream.
You should consider various investment options for your nest egg, depending on your specific needs. One of the most straightforward investment strategies for new retirees is to purchase an immediate annuity. There are many kinds of annuities on the market, some of which are complex and expensive. Most financial advisors steer clients away from variable annuities, whose payouts fluctuate with the market. With a single premium immediate annuity, you purchase the annuity with a lump sum of cash and then receive monthly annuity payments for life. Most vendors of immediate annuities are insurance companies, and your purchase of an annuity constitutes a contract between you and the company.
The amount of your monthly payment will depend on the amount you purchase, of course, together with current interest rates and the age of the purchaser. The insurance company will use actuarial tables to determine your life expectancy, and will calculate the payment based on that. Once the amount of your payment is established, it will remain fixed for life. If you are a 75-year-old male, for instance, and purchase a $100,000 immediate annuity, your monthly payment may be around $900, but payments will cease on your death regardless of how old you are when you die. This is called a “life only” payout option. If you want beneficiaries to receive any remaining value in your annuity, you can choose to purchase “life income with lump sum refund,” although with this option, your monthly payments will be closer to $700. And you can also elect to purchase an annuity with survivor benefits — meaning that your spouse will continue to receive reduced monthly payments should he or she outlive you. This option, also, will result in a reduced monthly payment while the both of you are still alive.
Purchasing an immediate annuity can have other benefits as well. If you are attempting to qualify for Medicaid — which requires that you have minimal assets — you may be able to shelter your money in an immediate annuity. Such annuities may also enable you to shelter money from creditors. However, laws vary from state to state — Medicaid laws in particular are variable, as each state maintains its own Medicaid program.
Disadvantages of Immediate Annuities
There are downsides as well. Immediate annuities do not provide a good rate of return on your money — you might be able to do better investing in a basket of stocks and bonds on your own. However, retirees who purchase immediate annuities appreciate the security. Also, because your payments are fixed, they will lose value over time, as inflation will inevitably erode your purchasing power. Your money is tied up — should you need it for some emergency, you won’t have access to what you invested. And, if you die early with a “life only” annuity, the insurance company keeps the entire lump sum.
There are many things to consider — get good investment advice if you’re not sure whether an immediate annuity is right for you.
An annuity calculator is a simple software that provides annuity rates based on the details you have entered into the software. This calculator locates the best annuity rates from the internet and the major advantage of using this calculator is that it saves an individual a lot of time. Without an annuity calculator, an individual would have to go from one provider to another in search of the best rates and would end up wasting a lot of time. Once your details are entered into the calculator, it produces a table consisting of rates and the best annuity providers at the top of the table and the worst ones at the bottom.
An annuity is a type of retirement plan in which the same amount is invested each year and the interest rate remains fixed.
To see the mathematics of an annuity (and the formula), click here.