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How to Create Your Own Pension: A Closer Look at Immediate Annuities

by Julie Jason

How To Create Your Own Pension: A Closer Look At Immediate Annuities Splash image

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.

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.

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Julie Jason directs the money management practice of Jackson, Grant Investment Advisers, Inc. of Stamford, CT. She is the author of “Managing Retirement Wealth: An Expert Guide to Personal Portfolio Management in Good Times and Bad,” (Sterling, 2011).


Discussion

Ann from Florida posted over 2 years ago:

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.



William from Maryland posted over 2 years ago:

what about variable annuities?


Wallace from New York posted over 2 years ago:

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.


Mark Cockerill from Washington posted about 1 year ago:

Annuities are just one of many tools one can use to assist you through living a fairly comfortable life in retirement. The one thing I do not like about this tool is that you give up your ability to influence your economic stability and growth. You have given that power to the insurance company. That is something I could never feel comfortable with.

You do not have to be a finanacial, math or business genius to learn how to make your own financial decisions and how to get the most out of your savings. A little reading and talking with people in your current situation (retired) gets you to first base. Then start talking to financial advisors and you begin to really understand "things". From that point on you become actively involved in your financial success working with a team that has specialized knowledge of investments and what is best for you. Naturally you have to pay for that knowledge and service but then you will pay for your annuity as well (nothing is free). What I have found is that you get what you pay for. Hire people to help you build a financial portfolio that takes care of your day to day needs but also allows it to grow for your ongoing life and the money you pay them in fees is well worth the money spent.

We all do this every day. When we need a carpenter or plumber or electrician, we ask around, check the yellow pages and or go online, then call and interview each company then pick the one we feel is best qualified with the fairest price. It is the same thing for financial advisors. Pick the best and you get the best.

Life is an adventure and I fail to see a good reason why you would want to give up your own financial power to someone else. Better to find a team you can work with.




Mike Mastriano from Florida posted about 1 year ago:

consider a charitable annuity.it has considerable tax advantages ,significant interest rate levels and is a worthy cause.


William Kloss from Florida posted about 1 year ago:

One reason you might want to give power to the insurance company is that one may not be mentally able to make good decisions later in life. Still, I don't think that is a reason to give up control of all of your assets.


Dennis Reimink from Michigan posted about 1 year ago:

I buy an immediate annuity every 5 years to begin paying 5 years from date of purchase. Only buy with monies intended to live on,5 years from then and have a 5 year pay window. I feel protected from stock market fluctuations.


Victor from North Carolina posted about 1 year ago:

Interest rates are too low now to consider buying annuities, at least the fixed immediate (IMHO). The more complex annuities have a lot more risk. We need higher interest rates. Then diversify: buy more than one and over time. Divide up, say, 25-40% of a lump sum amongst several annuities.


John Sebelius from Virginia posted about 1 year ago:

I'm curious about Mr. Reimink's 5-years out, 5-years pay idea. How does that compare to a 10-year CD ladder with cash-ins beginning the 5th year for net return? I.e. how much does the Insurance Company eat during those 10 year periods?


Leslie Fewster from Maryland posted about 1 year ago:

Informative article. Would like to see one like it on Equity indexed annuties.


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