Retirement Income Annuities are an important financial product, almost universally praised by experts; however, these annuities are still missing from many investor retirement portfolios.
While there are many reasons for this, the most critical cause for this is a lack of understanding by investors and advisors alike. They both wrongly think of an annuity as a one-dimensional product where the advisor simply fits you to the product.
Having worked with and innovated these products within the annuity industry, we know the opposite is true; annuities are multidimensional and can – and must – be customized to meet your specific situation.
Common Wisdom:
“An income annuity is like a pension. Annuities pay income for life, there is no residual benefit at your death and you cannot access money in an emergency.” Writers and academics often use this short hand description to the detriment of their readers and students.
Reality:
The reality is far different from this “common wisdom” and as my article will point out, in terms of the amount of income generated, customization can be worth far more the annuity company selected.
It’s like buying a suit from your favorite department store. If it doesn’t fit right, the suit is worth a lot less than what you paid for it.
The customization of these annuities holds unique advantages over the types of “annuities hated by some”, which are actually systematic withdrawal plans, rather than Retirement Income Annuities. (By the way, the tax advantages of annuitization can be quite significant over withdrawal schemes.) If you would like to try out customizing your own annuity, test out Go2Income’s Customize Your Annuity tool. Spending a few minutes with this helpful tool might just allude you to some possibilities you can receive from an annuity that is catered to your personal situation.
Example:
Two neighbors live side by side in a new housing development. Both have $100,000 in personal savings earning $1,000 per year in a bank account. Both are 65-year-old males. Neighbor A is a widower, and Neighbor B is married. Both want to increase the income from their $100,000 in savings.
Neighbor A purchases a Lifetime Annuity with no refund upon death to his beneficiaries and a level payment pattern. The result is an annual lifetime annuity payment of $6,358. Of that $6,358, only $1,596 is taxable in the first year.
Neighbor B purchases a Lifetime Annuity with a 100% refund to his beneficiaries and a CPI increase payment pattern. The result is an annual lifetime annuity payment of $4,534 increasing by the cost of living. Of that $4,534, only $857 is taxable in the first year.
Neighbor A is receiving 40% more income than Neighbor B; yet both got exactly what they needed. Neighbor A wanted the most income obtainable for his lifetime. Neighbor B wanted to make sure his wife and/or other beneficiaries continued receiving annual income in the event of his death until the balance of the $100,000 premium. Neighbor B also wanted to have those same annual payments increase with the cost of living. What can be customized?
So let’s review what elements of the annuity can be customized:
- Do you want payments for life or for a temporary period?
- When do you want to start receiving payments?
- How often do you want payments?
- What payment pattern do you want?
- Should payments continue to your beneficiary after your death?
- Will payments continue to your spouse? If so, at what level?
- What is the source of your premium? Taxable, tax deferred, or tax-free savings?
- Do you purchase the annuity all at once? Or do you ladder into your annuity holdings?
Subsequent articles will address each of these elements. In the meantime, check out www.go2income.com, to get an idea of how you can design your own annuity to fit your needs. Note: All annuity purchase rates and related information are based on patent-pending Go2Income market-based pricing methodology for the month July 2014, and do not represent any particular insurance company’s pricing.