Why you should add an annuity to your retirement

March 10, 2014 - PRLog -- There are innumerable ways you can use annuities in a retirement income plan.

In fact, that’s part of the problem. The good news is that there’s virtually no limit to the potential creativity that annuities can bring a retirement income plan.

Here’s one example. Consider a 65-year-old retired couple with $5,000 in fixed monthly expenses. We’ll ignore taxes and use rough estimates to make things simpler. If the couple has $2,800 in Social Security income, they’ll need at least $2,200 a month in guaranteed income in order to sleep easily at night.

They can obtain that $2,200 a month by investing about $528,000 into a variable annuity with a guaranteed lifetime withdrawal benefit (GLWB) of 5% a year, or by paying about $330,000 for a single-premium immediate annuity (SPIA) with an income stream that lasts as long as either spouse is living but not for less than a guaranteed “period certain” of 10 years.

Why is the immediate or income annuity cheaper? Two reasons. First, immediate annuities give you something called a “mortality credit” — or “survivorship credit,” as some prefer. The mortality credit is the dividend you earn by pooling your mortality risk with others. Over time, as owners of income annuities die and the contracts’ guaranteed periods expire, their assets pass to the remaining annuity owners, supplementing their income. That’s the mortality credit. Second, the income annuity pays out principal as well as interest.

When the owner of a deferred variable annuity with a GLWB dies, the remainder of the account, if anything is left, goes to his or her beneficiaries instead of to their fellow annuity owners. There’s no risk pooling, and no mortality credit.

If enhancing current income in retirement is your top priority, the mortality credit can be extremely valuable. Here’s an illustration. If, at age 65, you put $100,000 into a variable annuity with a GLWB today and immediately began taking income, you’d be entitled to at least $5,000 a year for life. If you put $100,000 into a fixed, single-life immediate annuity at today’s interest rates, you’d receive about $8,400 a year for life. The difference reflects the presence of the mortality credit and the fact that each annuity payment includes a portion of the original principal.

Risk pooling appeals to many people, because it increases the effective yield of their investment while they are living. Others find the idea of risk pooling — and the possibility that strangers might share their leftover savings — somewhat repugnant. Keep in mind that the longer you expect to live, the more likely you are to be a winner in the risk pooling game. If you don’t smoke, aren’t overweight, and your parents lived to age 90, you’re a good candidate for an income annuity.

If you are planning for your retirement and need help with it, please contact Mintco Financial at 813-964-7100 ( Michael Minter) or visit www.MintcoFinancial.com

Michael Minter is your local advisor in the Tampa Bay Area.