Whether you dread retirement or you look forward to it, proper planning can lead to a happy one. There have been several studies done to find out what makes a happy retirement. One of the highest contributing factors comes from having guaranteed income. Social security and pension plans might be enough income for some. But if not, you might want to invest in an immediate annuity.
What is it?
A retirement annuity is guaranteed income for as long as you are alive. You turn over a lump sum to an insurance company, and they pay you an amount every month. The amount depends on your age, gender, whether you’re single or married, the amount you invest, the type of annuity, the insurance company you invest in, and interest rates at the time. For example, today, the average 65-year-old man who invests $100,000 will receive about $550 per month, or $6,600 per year.
That may sound like a net loss at first. But at that rate, it would take just over 15 years to earn back the amount you invested. And remember, the income doesn’t stop; it’s guaranteed for life. So, if you remain in good health, there’s a high probability you will actually earn money from your annuity.
There’s got to be a catch.
Annuities aren’t for everyone. If you already earn enough from social security and pensions, or if you have a big enough nest egg with little chance of ever running out, then the extra income isn’t necessary. Also, if you are in poor health and don’t think you’ll survive the extra 15 years, then it would be better to hold off.
Depending on the type of annuity and the insurance company, there could also be some fees involved. These are easily avoidable if you’re careful, but they can take away up to 10% of your investment if you’re not. The good part is, these fees lessen over time, until they expire completely. Talk to your salesperson and have them outline any potential fees for you, before you buy.
You may also believe you can see a better return on your $100,000 if you invest it yourself, instead. That may be true, but there’s always a risk involved. If that $100,000 is necessary for your financial security, you don’t want to lose it in a gamble. And if you live well beyond your life expectancy, you may run out of money at some point, whereas an annuity is still guaranteed.
Plus, there’s something in annuities that you can’t get from investing: mortality credits. Mortality credits work like this: if someone buys an annuity and dies before they make their money back, the rest of their investment gets turned into mortality credits, and then distributed among other annuities. So when you get your monthly check, it’s partly the return on your own investment, and partly the return on someone else’s. But the only way you can access that cash is to get an annuity of your own.
I’m convinced! Where do I sign?
Hold your horses. There are several steps to the process you should consider, if you want to make the best decision possible.
First, you must compare the rates of several insurance companies. Different businesses will pay you different amounts for the same investment. In some cases, the difference could be rather substantial.
After that, you must research your chosen company. It can be easy to get pulled into the insurance company with the highest rates, but don’t go to them blindly. You want a company with a solid foundation, that can make good on its promise to pay you every month. If a company has bad online reviews, or it doesn’t seem like it will stay open much longer, don’t go with them.
Beware: there will always be scammers out there, who will be happy to take your investment and not give you anything in return. To anyone who offers you an annuity, you always want to do research on them. The internet is a wonderful tool for this. If you can’t find any information or reviews online about the company, odds are, it’s a scam and you should avoid it like wildfire.
Of course, in the right hands, your investment could provide you the financial comfort you need to be happy in retirement. If you decide getting one is right for you, don’t delay; every day without one is a day of earnings missed. Start your search as soon as possible!