Retirement Income for Life: I just retired. I have spent my entire life working, and now that I am retired, I am looking forward to relaxing and having some fun. I need to determine how much money I can spend each year once I’m retired without worrying that I won’t have enough. My previous employer contributed $200,000 to my 401(k), giving me a total of $400,000. We are an elderly couple; I am 65 years old, and my wife Emma is 56 years old. We would like to have a guaranteed income for at least the next 20 years, either for myself or for Emma if I do not survive that long. What different kinds of annuities are there for me to choose from?
How to: retirement income for life
There are two potential resolutions that we would like to present to you. As is the case with all aspects of investment planning, each choice comes with its own set of benefits and drawbacks; it is my responsibility to make sure you comprehend both sets.
Option 1: Lifetime financial security
There are many kinds of annuities available, and choosing the right one can help you ensure that your beneficiary will also have a source of income for the rest of their lives, in addition to your own. “Lifetime five” is the name of one of the potential solutions. An investment in this type of annuity will see your money spread across a diversified and professionally managed portfolio of stocks and bonds. The annuity provider is in charge of making all of the necessary investment decisions.
It is initially guaranteed that you will receive, for both your life and the life of your wife, five percent of the total amount that was initially invested each year. You would be eligible for this type of annuity because both of you are over the age of 55. The minimum age requirement is 55 years old. An income payment of at least the following amounts is guaranteed to be available to you by the company that issued your annuity:
$200,000 multiplied by 5% equals $10,000 per year for the rest of your life and the rest of the life of your wife for as long as you both shall live.
This is the least amount of guarantee that the insurance company will provide. You also can increase the minimum amount that you are paid once every three years with this annuity. Take, for instance: If you invest $200,000 and after three years your portfolio has grown to $215,000, the new minimum guarantee is as follows:
$215,000 x 5 percent = $10,750. You have each just received a raise of 750 dollars annually for the rest of your lives.
On the other hand, after three years, the value of your portfolio might decrease to $190,000. In this case, you would not be eligible for any stepped-up minimum guarantee, which means that you would only be entitled to receive the sum of $200,000 multiplied by 5 percent, which is $10,000 annually for the rest of your lives. In three years, you would have another opportunity to increase the stream of income you bring in.
Keep in mind that you have the opportunity to increase the value of this account once every three years; however, the amount of your annual payout can never decrease; it can only increase.
You could ask, “What should I do if I need some money in a lump sum for an unexpected expense?” In this scenario, you would be able to withdraw the value of your portfolio, less any withdrawals and penalties that have already been incurred. It will likely have some value, but due to fluctuations in the market and withdrawals, that value might be less than what you initially invested. There is also a possibility that you will be required to pay a surrender fee of up to ten percent.
Advantages:
Known income stream for the rest of one’s life, with growth potential. (In this particular example, a minimum of $10,000 per year for the rest of your life.)
In terms of income streams, you do not face any potential losses, but there is upside potential.
Every three years, you will have the opportunity to participate in market gains and possibly adjust your income upward.
If, after the surrender period has passed (which is typically between seven and ten years), the value of your account has increased, you will have the option to terminate the contract and purchase another annuity if you so choose. If you don’t want to wait another three years to increase the amount of money coming in, this might work out in your favor.
a guaranteed income stream for more than 20 years, if you live longer than 20 years, and for the remainder of your wife’s life, regardless of the number of years, she may live after your passing.
Disadvantages:
If you need to withdraw the entirety of your money within the first seven to ten years after investing it, you will be required to pay a surrender fee that can be as high as ten percent of the total amount.
If you decide to withdraw from the annuity contract to obtain the funds in a single sum, the value of your account may decrease relative to the amount that you initially invested.
There is a fee associated with using the services of the insurance company that provides this “income for life guaranteed benefit,” regardless of what occurs to the account value. To provide these guarantees, there is a requirement for additional annual fees to be paid. It is reasonable to anticipate receiving somewhere between 0.50 and 0.75 percent of the total value of the account.
Option 2: You receive an income for the rest of your life or for the next 20 years, whichever comes first. (Starting Payments Immediately)
An immediate annuity is what we mean when we talk about this particular kind of annuity. An annuity contract is purchased here, and then the contract is immediately converted into an annuity. In this instance, things are somewhat less complicated, but as we will show you, the less complicated circumstances may come at a cost to you in the long run.
The primary benefit associated with this type of contract is that the annual payout for this contract is greater than the one provided in the earlier illustration. The immediate annuity quotes that we get from different companies come out to an average of $13,500 per year for an individual with a total investment amount of $200,000.
Let’s take a look at the process behind this. In the scenario presented here, the insurance company that issued the annuity will pay you $13,500 each year for the rest of your life or for 20 years, whichever comes first. Therefore, the annuity company will pay him $13,500 every year for the next 25 years if you live for 25 years, reaching the age of 90. If you only live another 11 years after that, his beneficiary, who is likely to be his wife Emma, will receive the remaining 9 years’ worth of income payments totaling $13,500, and then that will be it. At the end of your life, the annuity company is aware that if they have not already paid out 20 years’ worth of payments to one of the beneficiaries, they will get those payments if they have not already paid out the annuity.
Let’s say you pass away 21 years after he first started carrying out the terms of this contract. Because the annuity provider has met its obligation to make payments for at least 20 years, the company will not be making any further payments to anyone. There is going to be no more money left over in the contract, and your wife is not going to receive anything.
You could ask, “What happens if I need to take the money out to pay a medical bill after ten years have passed?”
The correct response is that this is not possible. When you enter into a contract for an immediate annuity, there is very little room for maneuver once you have committed to the terms of the agreement. After signing the paperwork, you will no longer have any value that can be converted into cash. The only thing the insurance provider is required to do is make payments to you for the next 20 years, or for the rest of your life, whichever comes first. After the obligation of the annuity has been met, the contract is no longer worth anything.
Advantages:
Known stream of income throughout the owner’s lifetime.
Streams of income with a higher starting point are constant.
Because the underlying investments are the responsibility of the annuity company, there are no worries regarding those.
An income stream that is guaranteed for twenty years, and if the owner lives beyond twenty years, the annuity company will continue to pay the same amount even after the owner has passed away.
Disadvantages:
After investing your money, you will not be able to receive it in the form of a lump sum at any time if you decide you need it. You are only able to collect the payments from the annuity.
If you live for twenty years or more after purchasing this annuity, your beneficiary will not receive any money from it.
There is no way to increase the stream of income that you receive. Your payments will remain the same and there is no possibility that they will increase due to the effects of inflation.
These are just two of the many choices open to a person depending on their circumstances. Both of these annuities come with their fair share of advantages and disadvantages. It might make sense to have a conversation about the specifics with our local annuity consultant who is based in Denver, Colorado.