Why Annuities?

The concept of retirement has changed drastically over the past 45 years. Retirement for our parents relied on their Social Security income and their Pensions. A pension was basically a lifetime contract. You received a fixed monthly income for the rest of your life, and some pensions also included cost of living increases!

In 1974 the Employee Retirement Income Security Act created the IRA where you could save money tax free until you needed it for retirement. Then in 1979 a provision was added to the Internal Revenue Code, Section 401(k), which allowed employees and employers to transfer pre-tax income directly into retirement saving accounts.

Pensions today are being replaced by 401Ks and IRAs. These are merely different methods of saving for retirement. There is no contract and when the money runs out, the income stops, and stock market volatility and taxes can play significant roles in how long our savings will last.

Longevity is becoming a major factor in our retirement. Will you outlive your money?

Retirees are beginning to recognize the importance of larger fixed income sources for the rest of their lives. The latest SSA Statistical data shows how the larger percentage of retirees who were starting their benefits at age 62 back in 2004 are now being overtaken by those who are waiting until their Full Retirement Age or later. The longer you wait, the larger your lifetime income level.

But Social Security alone does not supply you with a large enough guaranteed fixed income stream. Your 401k and IRA accounts are generally invested in the market which can be volatile and unpredictable. The market does not “guarantee” that your money will outlast your longevity.

One of the best horrible investments you can make!

We like to call our annuities the best horrible investments we have made, but that terminology is incorrect. An Annuity is not an investment which grows and falls with the market. It is a contract that guarantees a fixed income stream for the rest of your life.

There are many different kinds of annuities that you can purchase, and each annuity company has their own special ways of making theirs look like the best.

Our annuities, like most, are divided into two parts; the annuity value side, and the cash value side. If you are looking for a great return on an investment, then you will probably feel like we do that the cash value side is a horrible investment! In our case, there was an immediate 8% bonus, but there is no guarantee that the cash value will continue to grow, and there are a number of early withdraw penalties if we ever say, "Give us our money back"! Also, since we included a form of life insurance, the cash value can actually decline due to "fees".

The guaranteed lifetime annuity side is why we made the purchase. We received an immediate 8% bonus and the annuity value continues to grow by 7% per year until we start the annuity payments. The annuity payout percentage also grows by about 2% each year which makes the payout value grow by about 9%.

When you start the payout, the lifetime income will be fixed for the rest of your life. Each yearly payout will be deducted from the cash value side. If you die before the cash value drops to zero, the remaining cash value will be a life insurance payment to your heirs.

Let's look at a real life example! This chart illustrates the differences in buying a $100,000 Annuity at the age of 58 vs waiting until age 60. The first thing to notice is that the age 60 annual payouts are about 12.7% less than the age 58 annual payouts. The size of your annual payments grows the longer you wait to start your payments, and your cash value life insurance value does continue to grow while you wait, even though, as mentioned above, it does grow at a relatively small rate.

Note: Most annuity companies do not allow you to split an annuity into multiple parts, start half of your payout at age 66 and the other half at age 70. For that reason, if you are considering one large Annuity, it will give you more flexability if you purchase a series of smaller Annuities.


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