Annuities are an oddly-neglected retirement option. I say “odd” because they provide guaranteed income for life, something many folks crave. They are a way to use some of your accumulated retirement capital to build yourself your own guaranteed pension plan. (And those of us without pension plans love to envy those who have them.)
Annuities provide an income for life that you can’t outlive, guaranteed by an insurance company and backed by an industry-sponsored guarantor called Assuris. Having an income for life is great incentive to live longer, having mitigated the fear of outliving your money. More on that in a second.
Economists seem to be in uncommon agreement that annuities are a good retirement vehicle. We have used them for some clients who value a guaranteed income above all else.
Still, many people have never been introduced to annuities, and many who look at the option decide against it. Why?
The main reason seems to be the fact that you have to give up your capital in return for the guaranteed lifetime income. This means that capital is no longer available to pass on to your estate and your children.
Survivor income guarantees are available for the spouses of annuitants for their lifetime, and the arrangement is identical to a pension plan. However, some people still want to make sure they leave behind as much estate as possible.
The current low interest rates are the other main reason people have shied from annuities. With the purchase of an annuity, you are locking in today’s interest rates for life. However, as a person gets into their 70s or 80s, life expectancy is much more important than the current interest rate.
For example, a joint life annuity with a 10 year minimum guarantee for a 65-year-old couple might pay out in the range of 5.7% per year in cash income, while the same arrangement for an 80-year-old might pay out 8.5%. The difference is simply based on the fact that the insurance company doesn’t expect to pay out for as long.
The interest-rate objection can be overcome by looking at variable annuities, which still provide a guarantee, but potentially higher returns linked to the rate of return on a stock market index or a mutual fund.
The best reference book for annuities is Life Annuities; An Optimal Product for Retirement Income, by Moshe Milevsky, a professor at York University, who I believe is Canada’s foremost researcher on the topic. For a shorter summary, go to MoneySense.ca, and search an article called Your DIY Pension Plan from the September/October issue of the magazine.
A topic that is guaranteed to be more universally popular is the idea of living longer and healthier. I happened to pick up the November 2005 issue of National Geographic in the waiting room of Yoga Public the other day, as the cover story caught my eye.
The article is titled The Secret of Long Life, and it tells why people who live in Okinawa, Sardinia, and Loma Linda, California live much longer than anywhere else in the world. Here are some of the things they had in common, to help you start out 2014.
10. Reduce your salt intake.
11. Switch from coffee to green tea.
12. Obviously, don’t smoke or use tobacco.
13. Emphasize activity, not TV.
There you have it - the “secrets” of communities where living to 100 is standard and active centenarians are common.
Just like your financial plan, start slowly with activities you can maintain and develop into habits, and just keep going as you start to feel better. Make sure your investments are going to last, and I’ll see you in 50 years!
(By the way, Happy New Year!)
* * *
Dollars and Sense is meant as an introduction to this topic and should not in any way be construed as a replacement for personalized professional advice.
Please consult legal, tax and investment experts for advice on your unique situation.
David Christianson, BA, CFP, R.F.P., TEP, is a financial planner and advisor with Christianson Wealth Advisors, a Vice President with National Bank Financial Wealth Management, and author of the book Managing the Bull, A No-Nonsense Guide to Personal Finance.