With traditional corporate pensions less and less common, many people find themselves retired without a regular source of income. While Social Security is indeed a retirement pension, it is often a very small fraction of a person’s living expenses and the eligibility age is creeping higher and higher. And with interest rates at record lows many people really feel the bite from a lack of income, as they have to dip into savings. There is one way to address this problem and that is to just go out and buy yourself a retirement pension that is guaranteed for life. The most common way to do this is also one of the oldest financial products out there: an immediate annuity.
While there are many variations of annuities available today, chances are that the average person thinks of an annuity in this form. An immediate annuity couldn’t be simpler. You give your money to an insurance company in exchange for a monthly income check for the rest of your life. And while there are a few bells and whistles available, such as inflation protection or joint annuities (income for life for both husband and wife), the basic structure is the same. Now, a note of caution. The very same squeeze on you from low interest rates is naturally happening with insurance companies as well. Therefore the amount of income that they will guarantee is less than even a few years ago.
Today a 65-year-old man who invests $100,000 might get some $550 per month for as long as he lives. That $550 monthly check may sound attractive compared with what you can earn on a bond or bank CD. But a few years ago, that same man could have received some $650 monthly for life.
That is a big difference and it may behoove you to wait until interest rates are higher before making the plunge. However, annuities don’t just pay you based on the current interest rate environment. Age has a lot to do with it as well. When you purchase an annuity your money goes into a pool with others. The insurance company then takes the usual statistics such as mortality rates into account. Therefore someone that is 65 years old, as in the example above, is going to receive a monthly check that is considerably lower than, say an 80 year old person would. When you make your analysis, it is a good idea to take a good hard look at your circumstance with the coldness that your insurance company would. Because your money is gone for good. If you buy an immediate annuity for say, $100,000 in exchange for a retirement pension for life and you get hit by a bus three months later, well, tough luck. That $100,000 cannot be left to your heirs (or anyone else) and the insurance company gets to keep all of your remaining dollars. On the other hand, if you live to be 110 years old the insurance company is still required to pay you a monthly check even though your initial deposit may have long ago been depleted. Of course piece of mind is an important aspect in retirement planning and an immediate annuity can often provide that. Guaranteed monthly income for life is an attractive option for many people. Still, as with any investment, including a simple one like an immediate annuity, it is always a good idea to look carefully before you leap.