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
- 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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