A guaranteed revenue may lower your retirement financial pressure and allow you a less-panicked strategy to retirement investing. Without any pension, you may be relying on Social Security as the solely guaranteed retirement income stream. Buying a life annuity may assure that additional revenue and makes excellent retirement financial sense in case your assets are modest and you need the guaranteed income. The only real reason that retirees hesitate purchasing life annuities is the loss of control of your resources and their use as your legacy. What is a solution to this dilemma?
The fixed term SPIA: a superior retirement financial choice
Use a single premium immediate annuity (SPIA). In this instance we're looking at a fixed term SPIA where you buy the SPIA for an immediate payout, but only for a fixed term - perhaps 5, 10, or 15 years.
The theory would be to buy the fixed term SPIA with only 50% of your savings (or some portion based on your needs). The period you select depends on how much extra assured revenue you need and what you intend to do with your other 50% of savings. Let's observe some examples for this method and how this can make sound retirement financial logic.
New retiree - getting adjusted
Take this hypothetical example. If you're a sixty six year old male starting retirement with $300,000 in retirement savings but no company pension, you may want to complement your Social Security benefits with the annuity income while you go after some avocation for your first ten years of your retirement. However you don't wish to lose control over your resources for later or alternative options.
As an example, you can purchase a 10 year term SPIA that would pay you $1,456 monthly to supplement your S.S. income for around $150,000. This would leave you with $150,000 in retirement financial savings that you may invest to possibly increase over the next ten years (e.g. in conservative mutual funds or index annuities). With the guarantee of the annuity income, you are able to invest this remainder of your savings more actively thereby making a smart retirement financial strategy (i.e. allocate some money for your pressing income needs, the remainder for growth of capital).
The growth you may reasonably anticipate will rely on your choice of investments and if that money is in a tax-deferred account. The latter would allow you tax-deferred high income purchases. Or, you can purchase a deferred annuity at an assured rate. However, you are in control of these assets while our $1,456 month-to-month income is guaranteed by the issuing insurance company for the next ten years on your SPIA.
Older retiree - worrying in regards to bequests and living expenses
Let's consider another instance of retirement financial life. Let us take an eighty year old female with $200,000 in savings and a house with no home loan. She's drawing down her savings at about $2,000 per month and is worried about depleting her savings and losing her legacy for her kids.
She might purchase an SPIA for a fixed term - perhaps 10 years - with a fraction of her financial savings to stop the monthly drain on her financial savings. Then, invest the remainder in a deferred annuity to grow for later use or as a legacy.
The retirement financial reality for many baby boomers is that they'll have to annuitize part of their nest egg (particularly, buying an annuity and receiving payments in return). Although one gets absolutely nothing back in the end of the annuity payments, the big payments are going to be the sole way that great numbers will have enough retirement income to make it.