With the rise in interest rates in the past year, insurance companies have raised the amount of lifetime income that they will pay using annuities. The amount of income that insurance companies will guarantee for the life of the owner is largely based on the age of the owner, interest rates that they expect to earn, and life expectancies. Even the “CD type” annuities with 3-5 year guarantee periods have experienced rate increases to as high as 5.70% to 5.75%.
Traditional income annuities, called Single Premium Immediate Annuities (SPIAs) and Deferred Income Annuities (DIAs), require that a buyer specify at the time of purchase an exact date for their lifetime income to start. Once started, typical minimum periods for guaranteed income if a purchaser dies within the specified time period will be 10-20 years or any remaining amount unpaid as income from the original premium, without interest credits, would be paid to beneficiaries.
There are alternatives to those traditional income annuities that allow the purchaser to elect on any future date when he or she decides to start lifetime income. Amounts that will be paid are guaranteed at the time of purchase for any year in which the owner decides to start receiving lifetime income payments deposited directly into the owner’s checking account as a source of retirement income. While it is common for those with a broadly diversified portfolio to only safely withdraw 3.5% to 4% from the portfolio for income, an annuity income can frequently be twice those amounts.
For example, the highest lifetime income guaranteed by a highly rated life insurance company for a person age 65 purchasing an annuity with $100,000 if income is to start immediately would be $7,590 per year (7.59%). If that same person waited 5 years after purchase to start his/her lifetime income, the amount guaranteed at the time of purchase would be $11,749 per year (11.749% of premium). Amounts payable for the joint lives of spouses would be slightly less. If the age of the purchaser is younger, the amount payable will be less, but purchasers of older ages will be higher. Interest would be credited to the account value of the annuity, so any remaining balance in the account after the death of the owner would be paid to the named beneficiary.
Some plans offer lower initial income benefits but provide for benefits to increase after the start of income benefits. These plans can be particularly beneficial to mitigate the effects of inflation. An alternative approach to addressing inflation using the fixed income payouts is to “ladder” multiple policies to start lifetime payouts at different intervals as needed.
Of course, it is important to evaluate your options with a qualified retirement income advisor who understands how these plans function.
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