Why should seniors take risk to generate retirement income with equities if they may not have to!

As a senior, one the biggest fear (besides bad heath and death) is running out of retirement money. Of course there are many plans available that offer income, but few offer guarantees like annuities do.  Unless of course you would prefer keeping your money in a savings account and collecting, at best, 2% on your money. Read on…

In this world of risk taking to get a “good” return, it is refreshing to know that a good return is still possible, without risking losing your monthly income payment. If you have not considered it before, as a senior citizen, it behooves you take a look at income annuities. You may have encountered annuities as an alternative to Bank CDs but these income annuities are a bit different. Unlike differed annuities, these income or also called immediate annuities pay you an income for life or a designated time you select. The income is guaranteed no matter what the stock market does and it is paid directly to you. It can even be paid to you and then a spouse once you are no longer around.

Unlike mutual funds, which can also generate an income, these immediate annuities are not subject to fluctuations. What that means to you is tremendous peace of mind. We have spoken to seniors who have actually felt more emboldened to invest in the stock market with other moneys they had and, in some cases, ended up with a higher rate of return on that additional money than they would otherwise have. Consider this, if you know that a certain amount of money will paid to you no matter what and all your expenses plus more are covered, would you not feel more comfortable taking some risk with other investments. After all, worst case scenario, you may lose some or all of these other invested moneys, but your life would not be so affected because your income annuity would be there for you.

Income annuity that pays more and follows inflation

When a senior elects to place their hard earned retirement money into an income annuity they certainly don’t want to see its value go down because of the cost of living going up. After all, what cost $1.00 10 years ago may today cost twice as much! A retired or even working senior who needs to draw an income from investment does not want to lower their standard of living or have to take on extra work to compensate for inflation. That is why some annuities (most do actually) come with an inflation rider. That rider promises to keep up with a certain rate of inflation of your choice (2, 3, 4 or 5 percent) and prevent some or all the erosion of the seniors buying power. These riders are not usually automatic so make sure that you ask that it be included in your new annuity plan. There is a small cost to this rider but it is very worth it! Something a retired senior will learn to appreciate more and more as the years go by.

The company you choose is the company you may HAVE to keep!

Know that with an income annuity, you may relinquish all or some of the control you invest with the insurance company you select. After all, that may be the only risk you take. At the same time as you hope to draw an income for many years, the insurance company bets on the opposite. After all, that is how they are able to pay you a much higher income than average. They know that some people will live long and some will not and calculate pay outs based on these mortality calculations. Since your money can be locked in to the company you select, it is important to find a company with a good financial rating and a history of continued stable ratings. I would suggest that, with any investment, a continued high rating of at least 25 years is important (B+ to A++ by AM Best).  You may also want to consider looking at their Better Business Bureau rating.

This takes us to another important rider?

The death benefit rider! That rider allows for a win win situation. Although there is a cost to add it, it may be the peace of mind a retired senior needs. With this rider, if a senior purchases an income annuity and dies shortly after, the remaining amount of money deposited is paid to survivors. For example, Mary Senior decides that she has had enough with unpredictable or low paying equities (stocks, bonds….) she calls a well rated insurance company and deposits $250,000 into an income annuity. The insurance company starts paying her a monthly income immediately and all is well. Unfortunately, a short while later Mary Senior dies in an accident and only collected $25,000 out of the $250,000. Because Mary had the foresight to also buy a death benefit rider, the remaining $225,000 is paid out in one lump sum to a beneficiary she had selected (can also be paid in smaller amounts over time). Good job Mary! If she had not purchased the death benefit rider, the remaining amount ($225,000) may have been kept by the insurance company. Please note that not everyone qualifies for this rider and cost may vary greatly.

I hope this short article has helped you get a better understanding why an income annuity can be great alternative to some other investments or an addition to existing investments. As we say in all of our articles, make sure to ask a lot of questions before investing any money and review all papers you receive from the insurance company every year. . You can always feel free to ask us questions about income annuities or other retirement questions. Be well.