Worried You’ll Run Out of Money One Day? Read this article about annuities
How to receive a level of income that matches your longevity?
With the progress of technology and medicine, the average human lifespan is continuously increasing. Many of us reading this article could quite possibly live to be over 100 years-old. It is mind-boggling to think that the years we spend in retirement could very well end up being longer than the time we spend working. i.e. We enter the workforce in our 20s until we retire in our mid-60s, then suddenly realize there is potentially still 50 years of life ahead. Scientists predict that within the next five to ten years, the average human lifespan will increase by 30 years. Is a good thing to have a long life? Of course, it is! But the key is to not outlive your income.
Picture an elderly couple in their 80-90s. Neither of them expected to live to such a ripe old age, and certainly did not prepare themselves financially for it. As time goes on, the couple starts to feel the pinch in their expenses, and eventually reaches a point where they are running on financial fumes. They have no source of income other than social security; and to make matters worse, cost-of-living expenses continues to rise relentlessly.
Like this imaginary couple, many are watching their savings dwindle away. They are struggling to make ends meet, or feel they are merely one serious illness away from financial disaster. The root of the problem is simply that there isn’t enough money to spend. This is where annuity payments can really make a difference in one’s standard of living.
What is an annuity? What does it do? Let’s talk about that.
1. What is an Annuity?
As the common saying in the financial industry goes: buy life insurance to protect against not living long enough, and buy an annuity to protect against living too long without any money. In the earlier days, lifetime salaries were offered in Taiwan, which provided retirees relative financial peace-of-mind. In the U.S., some larger corporations and government agencies provide pension plans for their employees to ensure retirees from the institution receive lifetime payments. An annuity is similar to a pension plan.
An annuity works by an insurance company growing funds paid into the annuity, while the amount, frequency (annual or monthly), and commencement date of the annuity payments are predetermined by the client, and can be designed to sync-up with the client’s retirement. The great thing about annuities is that you will receive payments for as long as you live. That way, even if your old age, you won’t have to worry about not having enough funds to survive. It is as if you are setting up a pension plan or providing yourself a lifetime salary.
2. The Benefits of an Annuity
The recent environment has been difficult for older consumers. How can one expect to survive when bank interest rates are so low? Having a steady income from annuity payments would relieve much financial stress, since annuities were designed specifically for this type of situation. In reality, having an annuity is even better than having a pension or lifetime salary. How so? For pension plans and lifetime salaries, payments do last for a lifetime, but have the risk of being cut short if the payee’s life is not prolonged. Nowadays, annuities have evolved to have newer features: rather than the actual Account Value, the timing and the amount of annuity payments are calculated from what is called the Benefit Value. If you have a long life, then you’ll certainly enjoy the prolonged annuity payments; and if, God forbid, your life is cut short, the remaining Account Value minus the amount already paid out will be given to your beneficiary. Is that not a much more user-friendly approach? If, for example, you decide not to stop receiving payments midway, you’re also able to withdraw the annuity funds in one
lumpsum. These features make annuities more flexible than pensions and lifetime salaries.
3. The Two Categories of Annuities
Depending your needs, annuities either focus on a higher potential return or on a greater guarantee. For those of us who are in their 50s and 60s, it’s a good time consider asset distribution: should the focus be on high returns and high growth, or on lower risk conservation? Having steady annuity payments provides the peace of mind that is needed when investing – at least you know there’s a safety net. Annuities are similar to pension plans or a lifetime salary, but more
flexible because payments remain steady through unemployment, old age, low interest rates, and investment losses. You spent half of your life working hard, why not include an annuity in your financial planning, so that you can truly enjoy retirement without having to skimp on expenses to maintain your
lifestyle quality.
4. Three Types of Annuities
There are essentially three types of annuities. The first type involves receiving annuity interest payments and usually don’t have high yields. Sometimes the interest rate for the annuity is locked-in for a few years, while other times the rate fluctuates. In lower interest rate environments like the current one,
this type of annuity is not the most favorable. The second type of annuities follow the market: your annuity grows when the market performs and
drops when it doesn’t.
The third type are indexed annuities. Indexed annuities grow when the market grows, but retains its value even when the market falls. Some indexed annuities even offer a guaranteed growth percentage regardless of how the market performs – the rate, which is typically around 6%, would then be applied to your Benefit Value to calculate your actual payment. Therefore, other than preserving the principle, you’re also able to add value to your benefits. Indexed annuities are suitable for those who are not as concerned about the potential of growth as they are about receiving guaranteed annuity payments of a set amount. Some indexed annuities also offer bonuses that come with higher potential returns in lieu of guaranteed payment amounts. It’s also possible and good practice to investment in both kinds of indexed annuities. That way, you’ll be able to enjoy both the guaranteed as well as the potential growth aspects of the financial product.
Summary
In order to have a level of income that matches your longevity, it’s a good idea to invest in annuities with a suitable structure. This type of protection and production that comes from annuities will allow for a more stable retirement.
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