You may be saying “Wait! Wait! Wait! Hold up. I thought annuities are bad?”
Annuities are not bad, just like any given tool can’t be “bad” – there’s just a time and place where it serves you best. In fact, insurance companies that offer annuities are the only institutions that can give you a firm guarantee that your money will last forever, without running out.
Lifetime income annuities are made up of three components:
1. The money put into the annuity.
2. The interest the insurance company gives you.
While the first two are simple enough, you may not be familiar with longevity credits. Here is how I can best explain them: Imagine that you are in a room with 100 people.
Each one of them has $100, and they all put their money in one pot, so the pot reaches $10,000. Now, let’s say that ten of these people die. There are only 90 people remaining in the room but still $10,000 in the pot, which means that each person now gets a $111.11 share – up from their original $100.
Longevity credits work exactly like that. Insurance companies examine actuarial charts and figure out how much money they’ll payout based on the life expectancy of the people. The longer you live, the better, as it means there’s less money to surrender and a bigger share.
Thanks to the concept of longevity credits, lifetime income annuities can beat any guaranteed interest rate a bank or investment house can offer you.
Why is this guaranteed income and growth (unless people stop dying) so important? We saw a lot of older Americans who thought they were comfortably retired until the Great Recession hit, and then they lost everything. Unfortunately, many of them were forced to go back to work or had a drastic reduction in quality of lifestyle.
So, there are some important things to understand about insurance and annuities to make sure they work correctly for you.
For instance, a common question about annuities is, “Will the insurance company keep all of my money when I die?”
The answer is “Yes,” as they can assume your funds if you pass away!
To prevent this from happening, we add some of those “bells and whistles” to the policy, such as making sure any money not used goes directly to your heirs when you pass away, or by adding a second person to the policy who will most likely die after you.
Another question you may have is, “Do I give up control over how my money is invested with an annuity?”
The answer, again, is yes, as you do give up control over how your money is invested. But that’s a small downside considering what you do gain with a policy like this:
Let’s say the stock market drops 38% – like it did in 2008. You’ll still get your same guaranteed payout every month no matter what. You don’t have to worry about the fluctuation of the market at all. You can just focus on the next phase of your life and live comfortably.
Am I saying that you should put all of your money in a lifetime income annuity? Definitely not. You only want to commit enough to generate the monthly income you need to ensure that your basic standard of living is covered.
*Age of $elf Reliance Tip:
If you are over sixty years old and have not retired yet, we can set up an in-service distribution. This will allow you to roll over your 401(k) to an IRA without penalty. Then, you can turn that IRA into an annuity. The IRA policy will make sure that you have an additional stream of income when you decide to retire.
Example: You are 61 years old and you want to retire at the age of 67, but your basic income gap is $6,000 right now. You can move $100,000 from your 401(k) to an IRA, and the IRA will guarantee that you have $6,000 coming in for the rest of your life.