Retirees have always worried about running out of money and becoming dependent on others. Today, many are even more anxious about it because interest rates are so low.
The days when you could get a decent stream of income from Treasury bonds and certificates of deposit are gone. That doesn’t mean that Treasuries and bank CDs aren’t options. But you can no longer rely on them exclusively.
Furthermore, many companies have done away with traditional pension plans that used to protect retirees. Social Security is invaluable, but it provides only about 30% of the average retiree’s income.
Retirees who have a guaranteed monthly income for the rest of their lives are happier than those who don’t, according to a study by The Wall Street Journal from a few years ago. They also live longer, on average.
So, how can you get more guaranteed income to remove the financial worry from retirement?
How to create your own pension
It’s simple: Create your own pension. A lifetime annuity produces guaranteed lifetime income, like a traditional pension. Many insurance companies offer them.
You can make a one-time cash payment to buy an annuity. Alternatively, you can roll over the funds from an IRA, 401(k) or other retirement account. Either way, when you do so, you’re buying a single-premium annuity. Or, on the other hand, you may choose to make a series of smaller regular deposits to a flexible-premium annuity. It’s your call.
An income annuity is a contract with an insurance company that converts your premium deposit into a guaranteed stream of income. In exchange for that guarantee, you give up your cash value. An installment refund guarantee is an option that says that if you die before collecting the full value of your deposit, your beneficiary will continue to receive payments until the total payout equals your original deposit. Most buyers choose this feature, which may reduce the amount of your monthly payments when compared to an annuity without it.
A lifetime annuity hedges against the financial risk of living a very long life. Independent experts and economists say most people should allocate a significant portion of their savings to this type of annuity. The right amount depends on your circumstances.
A deferred income annuity combines a future stream of income with tax-deferral, because you pay no taxes until you begin receiving income. Even then, the payments you’ll receive (unless from an annuity in an IRA or other retirement plan) are only partially taxable, because some of the income is considered a nontaxable return of premium.
A deferred income annuity postpones income payments until a future date that you choose. Most buyers choose to start taking payments when they turn 80 or older.
When you buy the annuity, you’ll know the exact amount of monthly lifetime income you’ll receive and the exact date when it begins. You must pick the start date for payments when you buy. Some insurers will let you change the date later on. You can buy either a single-life annuity or a joint-life annuity, which typically covers both spouses.
It’s the most efficient way to protect against outliving your assets — whether you live to 88 or 98 or 108.
The power of the approach results from two things. First, the insurer invests your money for many years, enabling it to compound until you begin receiving income. Second, buyers who do not live to an advanced old age in effect subsidize those who do. That’s the magic of insurance.
The longer you delay taking payments and the more advanced age you start taking them, the greater the monthly payout.
How much will you get? Three examples
Here are three scenarios (as of late October 2020):
- John, age, 65, pays a $150,000 premium, with income starting at 80. He is single and does not choose the return-of-premium guarantee. He’ll get $2,380 in monthly lifetime income.
- Jane, 65, also pays $150,000 deposit, with income starting at 85. She wants to leave money to her niece, so she chooses the return-of-premium guarantee. She’ll receive $2,786 a month for her lifetime.
- Eric and Erica, a married couple who are both 70, buy a joint annuity with a $150,000 deposit. They don’t take the return-of-premium option. Starting at 83, the couple will receive $1,808 a month. Payments will continue as long as either spouse lives.
A different way to plan for retirement income
The deferred income annuity, sometimes called a longevity annuity, offers a different way to plan for retirement.
Let’s say you’ll retire at 65. You can use part of your money to buy a longevity annuity that will provide substantial lifetime income starting at 85, for example. Then, with the balance of your retirement money, you only need to create an income plan that gets you from age 65 to 85 — instead of indefinitely.
Also, you might be able to delay taking Social Security until age 70 this way and thus get bigger payments later on.
You won’t have to deal with the uncertainty of trying to make your money last for your entire lifetime. And since you know you’ll have assured lifetime income later on, you can feel less constrained about spending money in the early years of your retirement.
Hate RMDs? How about a QLAC?
Another option is to buy an annuity within an IRA, known as a qualified longevity annuity contract (QLAC). A QLAC is an income annuity that meets IRS requirements. Over your lifetime, you can allocate 25% of the total of all your IRAs, or $135,000, whichever is less, toward the purchase of a QLAC. In future years, the $135,000 limit will be adjusted for inflation.
It lets you defer up to 25% of required minimum distributions and thus reduce your taxes until payments begin. Unlike other annuity income, QLAC income is 100% taxable, but it’s money you’d eventually have to withdraw from your IRA (and pay taxes on) anyway.
Lifetime annuity income reduces retiree anxiety and promotes well-being. You can create your own pension.
More information, including updated interest rates from dozens of insurers, is available at www.annuityadvantage.com or (800) 239-0356.
Retirement-income expert Ken Nuss is the founder and CEO of AnnuityAdvantage, a leading online provider of fixed-rate, fixed-indexed and immediate-income annuities. Interest rates from dozens of insurers are constantly updated on its website. He launched the AnnuityAdvantage website in 1999 to help people looking for their best options in principal-protected annuities. More information is available from the Medford, Oregon, based company at https://www.annuityadvantage.com or (800) 239-0356.
FTC: H&R Block 'Data Wiping' and Upgrade Policies Harm Taxpayers
Tax Filing The FTC says H&R Block deceives customers into paying more and makes downgrading unnecessarily difficult.
By Katelyn Washington Published
Is This New Portfolio Allocation Trend a Fad or a Winner?
The 25x4 portfolio is supposed to be the new 60/40. Should you bite?
By Nellie S. Huang Published
Facing Workplace Discrimination? Seven Ways to Address It
Standing up against workplace discrimination in a way that provides the best chance of a positive resolution takes courage. Here are some approaches you can take.
By Brittany Deane Salyers, J.D. Published
Three Strategies for Small Businesses to Reduce Taxes
Small businesses can lower their tax liability by taking advantage of tax breaks, tax credits and charitable donations. Here are some options.
By Anthony Martin Published
Health Care Costs in Retirement: Budgeting for a Healthy Future
Many factors affect your health care costs as you age, including where you live, your Medicare selections and whether you have long-term care insurance.
By Brandon Hill Published
The Three Basic Components of a Good Estate Plan
Getting your estate in order so everyone knows what you want when the time comes can save your loved ones confusion and stress.
By Jason “JB” Beckett Published
Is Your Financial Adviser Listening to You?
Survey finds financial advisers and their clients might need to break out the talking stick. Repetition and summarizing are key to ensure your points are heard.
By Suzanne Norman, CIMA®, CPCC Published
Did You Get a Cash Windfall? The Case for Doing Nothing
An inheritance or lottery win can be a stroke of good fortune, but if you mismanage your funds, you could end up worse off than before your windfall.
By Samuel V. Gaeta, CFP® Published
How to Use Your Estate Plan to Save Tax Now: A Timely Update
Consider an upstream basis trust and a general power of appointment for an older family member to reduce capital gains taxes on highly appreciated assets.
By John M. Goralka Published
Three Common Mutual Fund Misconceptions Debunked
Mutual funds let investors access a basket of securities rather than buying individual ones on their own, but there are some misconceptions about them.
By Brian Spinelli, CFP®, AIF® Published