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Retirement Annuity – How Does it Work?

Stan Haithcock
April 29, 2020
Retirement Annuity – How Does it Work?

A retirement annuity can be multiple types of annuities. I think most people when talking about a retirement annuity, they're talking about a lifetime income stream. An immediate annuity, a deferred income annuity, or qualified longevity annuity contracts. Something that's going to create a pension type income stream.

Americans already own the best annuity on the planet, the best inflation annuity on the planet for that matter. It's called social security. If you have a social security number, you own an annuity. I know that's crazy.

Annuities have a monopoly on lifetime income. It's the only product on the planet that provides a lifetime income stream that you can never outlive. It's a monopoly. No other financial product does that.

But how does a retirement annuity work? When you use an annuity to create lifetime income you transfer your longevity risk to the company. They will pay you for the rest of your life. The primary pricing mechanism is your life expectancy at the time you take the payment. That payment is a combination of return of principal plus interest. The good news is if you outlive your life expectancy and the account is drawn down to zero, the annuity company's still going to pay.

You can structure that lifetime income stream so that if you die early, 100% of any unused money will go to the beneficiaries on the policy. The evil annuity company will not keep a penny. A lot of people say, "Hey, I'd never buy an annuity because I don't want the money to go, poof". You can have it go, poof, that's called life only, but you do not have to structure it that way. Annuities are customizable. Remember that.

Now that we know what they are, is a retirement annuity a good idea?

It depends on what your goals are. I always ask people two questions when they're looking for an annuity.

  • What do you want the money to contractually do?
  • When do you want those contractual guarantees to start?

Now, most people interested in a retirement annuity, want lifetime income. So, what do you want the money to contractually do? I want income. When do you want that contractual guarantee to start? I want the income to start in 30 days or a year. Then that's a Single Premium Immediate Annuity.

If it's, “I need income but I need it four or five years from now”, then we're going to quote Income Riders, Deferred Income Annuities, or QLACs depending on the type of account that you're going to use. In any case, quote all carriers for the highest contractual guarantees for your specific situation.

For principal protection, you can use a Multi-Year Guarantee Annuity or Index Annuity for CD type returns and full principal protection.

When it comes down to, is a retirement annuity a good idea? It depends on your specific goals. You need to tell me exactly what you want to achieve and then we can go find that policy and then shop for the highest contractual guarantees.

So is it a good idea? I think it is for people who are looking for contractual guarantees and no risk. It's a good idea for people that are tired of market fluctuations and want to go to the next chapter of their life where they know what's going to happen, whether its principal protection or income for life. That's really when a retirement annuity is a good idea.

How much does $100,000 annuity pay per month?

I get that question all the time. People want to know what $100,000 annuity pays or a $1,000,000 annuity pays. I cannot answer that unless I have some information from you. I need your date, or dates, of birth because this is a life expectancy transfer of risk. Life expectancy is the primary pricing mechanism on this type of annuity. Interest rates play a secondary pricing role.

The second thing I need to know from you is when do you need the income to start? I need your state of residence because fixed annuities are regulated at the state level. Additionally, I need to know the type of account that you're using - IRA, non-IRA, Roth IRA so you will know how the income will be taxed.

The last little piece of information I need is how you want to structure it. Meaning that if you die in a fiery plane crash, do you want all of the unused money to go to your list of beneficiaries? Or do you just want the highest payment and when you die the money goes poof? You can do exactly what you want. You just have to tell me.

Can you lose money in an annuity?

Can you lose money in an annuity? Let's look at it from an income stream standpoint. You can structure the income stream so that when your Learjet hits the mountain and you die, money goes poof. That's called life only. You can structure a lifetime income stream so that any unused money will go to your beneficiaries on the policy and the evil annuity company will not keep a penny under any circumstance.

With an income stream, a guaranteed product, like a Single Premium Immediate Annuity or Deferred Income Annuity or QLAC, it's up to you. You can structure it so you won’t lose a penny, or you can structure it so that when you die money goes poof, it's your call.

The other part of “can you lose money in an annuity?” there are state guarantee funds that backup fixed annuities to a certain point. But what you need to do when you're looking at an annuity to purchase is the claims-paying ability of the carrier first. You need to review their ratings and the Comdex score. Their ratings with A.M. Best, Moody's, Standard & Poor's and Fitch. We offer a Comdex Report on our site which shows all 4 ratings in addition to the Comdex Score of all the annuity companies out there. That's where your decision needs to be made and I certainly will help you with that because I'm going to be on the hook with you as well when I recommend a certain carrier, I want to make sure that that carrier can back up those claims so you don't lose a penny.

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