Over the past several decades, breakthroughs and innovation in medicine, fitness and nutrition have resulted in people living longer than they ever have before. In fact, the Centers for Disease Control and Prevention found there’s a record number of people in the United States over the age of 100. A Pew report shows the number of 100-plus-year-olds worldwide will increase eightfold by 2050.
It’s great that people are living longer, but a long life span can also present unique challenges. For example, you may need to plan for a longer retirement. It’s possible that your retirement could last 40 years or more. If you’re not prepared for that, you might find yourself in a tricky financial situation later in life. Fortunately, you have a few tools available to help you fund a long retirement. Annuities offer several ways to generate guaranteed lifetime income that will last as long as you live. Below are two popular annuity strategies many retirees use to generate income that lasts multiple decades:
Single Premium Immediate Annuity (SPIA)
One strategy to create guaranteed lifetime income is to use a single premium immediate annuity, also known as a SPIA. These are contracts issued by insurers that allow you to convert a lump sum of assets into a lifetime income stream.
When you open the policy, you make a one-time lump sum contribution. The insurer then calculates a payment amount based on your contribution, your life expectancy, and other factors, like prevailing interest rates.
Age is an important factor in the payment calculation. All other factors being equal, the older you are at the time you purchase the policy, the greater your payment will be. This is because your life expectancy may not be as long, so the payments will be made over a shorter period of time.
You can also choose to create a payment that is spread over two lives. For instance, you may wish for payments to continue for your spouse after you pass away. Most insurers offer this option. However, payments for two lives are usually lower than a payment for a single life.
Perhaps the most appealing aspect of a single premium immediate annuity is that the payments are guaranteed. The insurer has a legal obligation to make payments to you for the agreed upon term. Also, the payments are constant. That means they aren’t impacted by market fluctuations or other factors.
You can think of a SPIA as personal pension. You convert a portion of your assets into a guaranteed lifetime income stream. That could give you a solid base level of predictable income so you can better plan your spending and your retirement budget.
Guaranteed Minimum Income Benefit
One of the downsides of a SPIA is that they don’t offer much in the way of liquidity. Once you convert your assets to income, you can’t access those funds anymore. You simply have the income payments.
Deferred annuities offer a way for you to grow your funds and maintain some liquidity while also creating a guaranteed lifetime income stream. In a deferred annuity, you have some growth potential, depending on the type of annuity you choose. Fixed annuities earn interest. Variable annuities let you invest in the market and choose an allocation appropriate for your needs. Fixed indexed annuities offer interest based on market returns.
All of these types of annuities offer optional riders that generate guaranteed lifetime income. Many of these riders are known as guaranteed minimum income benefits, but they may also be called a guaranteed minimum withdrawal benefit. You pay an additional fee each year for the rider.
A guaranteed minimum income benefit, also known as a GMIB, lets you withdraw a certain amount each year. As long as you don’t exceed the withdrawal amount, that distribution is guaranteed for life. Even if you deplete your assets due to market fluctuation or withdrawals, you can continue to take the income for life.
If you need to take more than the guaranteed withdrawal amount, you have the ability to do so, but it may reduce your guaranteed income going forward. Similarly, if your policy increases in value, you may be able to increase your withdrawal based on the gains.
Ready to plan for a long, happy retirement? Let’s talk about it. Contact us at America’s Annuity. We can help you analyze your needs and develop a strategy. Let’s connect soon and start the conversation.