By: Shane Flait
Today’s retirees often don’t have a company pension. Their only steady source of income is their Social Security benefits (SSB). But often that’s not enough and they want to count on an income that’ll cover their living expenses. If they’ve acquired a decent amount of savings they can use an annuity to assure them an adequate income without losing control of their money. Here’s how.
For a lump sum, you can buy a Single Premium Immediate Annuity (SPIA) that can supply a monthly income for life or for a fixed term. That lump sum amount is now out of your control since you’re taking it as income. If you take it at 65 with a payout to you for life, it’ll take a large lump sum and may deplete all your savings leaving little or no legacy for your kids.
To assure yourself a reliable income yet maintain control of your money and legacy, consider a fixed term payout from an SPIA. How much of your savings you’ll use for the SPIA depends on how much assured income (i.e. SSB and pension) you have already, and what stage of retirement you’re in. If you’re ‘loaded’ or have a great company pension you don’t need to annuitize for the assurance of not outliving your money.
Let’s consider some options for purchasing an SPIA
*The fixed term SPIA option:
Here, we’re looking at a fixed term SPIA where you purchase the SPIA for an immediate payout, but only for a fixed term – perhaps 5, 10 or 15 years depending on your age.
The idea is to buy the fixed term SPIA with only 50% of your savings. The term you choose depends on how much extra assured income you need – beyond your SSB and pension – and what you plan to do with your other 50% of savings. Let’s see some examples for this approach.
*A New retiree’s approach:
If you’re a 66 year old man beginning retirement with about $400,000 or more in savings but no company pension, you may complement your SSB with an annuity income while you pursue some endeavor for the first 10 years of your retirement. But, you don’t want to lose control over your assets for later alternative choices.
As an option, you could purchase a 10 year term SPIA that would pay you about $2,000 per month to supplement your SSB for about $202,000 (you must do some research on this). This would leave you with at least $200,000 in savings that you can invest to grow over the next 10 years. With the assurance of the income that your SPIA gives you, you can invest the remainder of your savings more aggressively for a higher return.
If you can invest at a 7 or 8% growth rate you may recover your $202,000 lump sum with your investment money over those 10 years. The growth rate you can reasonably expect will depend on your choice of investment and the tax-deferred status of your savings. A tax-sheltered account (like an IRA) would allow you to seek tax-deferred high income investments. Or, you could buy a deferred annuity at a guaranteed rate. The key is that you’re in control of your remaining savings for later use and choices.
With assets under $100,000, don’t tie up your money in an annuity. It’s not going to provide enough income to make the purchase worthwhile. Consider part-time work and delaying retirement to increase your assets. Later when you’ve increased your savings, stopped working, and receive Social Security, consider the annuitizing options.
*Older retiree approach – worrying about a legacy and living expenses:
If you’re an 80 year old with $200,000 in savings and a house with no mortgage, you may be drawing down your savings at about $2,000 per month and are worried about depleting your savings and losing your legacy to your children.
You could purchase an SPIA for a fixed term – perhaps 10 years – with a fraction of your savings to cover the monthly drain on her savings that your SSB can’t handle. Your age may make opting for a life annuity, rather than a fixed term, a good option since your low remaining life expectancy would give you more income per lump sum dollar invested.
But use your remaining savings to invest in a deferred annuity to grow for later use or as a legacy
