How to Create Your Own Pension: A Closer Look at Immediate Annuities
by Julie Jason
Some retirees who face the danger of outliving their money (“longevity risk”) choose to self-insure through conservative investment and cash flow management.
Others transfer longevity risk to an insurance company by purchasing an “immediate annuity.” The insurance company has an advantage over the individual in that it can spread longevity risk across many lives with varying lifespans.
In this article
- Who Might Benefit?
- The Nuts and Bolts
- Costs and Taxes
- What Happens at Death?
- Annuity Innovations
- How Risky Are They?
- Questions to Ask
- Misunderstandings
- Buyer “Aware”
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Think of the immediate annuity as a “personal pension.” Like a pension, the immediate annuity can provide lifelong income. And, like a pension, the product carries certain risks that need to be addressed before making a purchase.
This article takes a closer look at immediate annuities. First, we’ll look at why certain retirees might benefit from buying an immediate annuity with part (but never all) of their savings. Then we’ll get to the general concepts—the nuts and bolts, such as when you get your money, how products are sold, costs, taxes, what happens at death and product innovations. We’ll then turn to risk, what can go wrong, and how guaranty associations can come to the rescue. Finally, we’ll review questions to ask before you make a purchase, with some ending thoughts about potential misunderstandings and how to avoid them.
Keep in mind that this is a general discussion that is not intended as financial advice. There are different features and benefits to consider and there is no way around the homework that it will take to determine what product might fit your particular needs, much of which will depend on your personal savings and cash flows.
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Discussion
excellent information here, however not enough of the drawbacks. Consider that you have given up entirely the funds for this immediate annuity and that the funds are no longer yours, and that there is no projected growth in value because you have given up your funds in their entirety. Also that in dying tomorrow, you have lost everything. Isn't it better to have the money available to you with the projection of growth through investing yourself through stable large blue chip stocks that have offered over a long period, proven dividends? Even CD's though small in % rates now, preserve the principle. I would like to know about other instruments that provide an income with out loss of principle.
posted about 1 year ago by Ann from Florida
Another option is a Charitable Gift Annuity. These are offered by many educational, religious and non-profit entities. In addition to the usual annuity characteristics, there is the opportunity to donate to an eligable institution and also obtain a tax benefit.
posted about 1 year ago by Wallace from New York
