Lifetime Annuities

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Lifetime Annuities Living Longer, Living Better In the 20th century the average life expectancy of Americans went from approximately 48 years old to nearly 78 years old. The most dramatic rise occurred in the first half of the century thanks to a variety of social and economic factors. Since World War II, the increase in life expectancy has been steady and consistent and has occurred across more demographics than it had previously. In post-war America people have become more informed about the benefits of diet and exercise, and they have, as one might expect, lived longer. Buried beneath the straightforward life expectancy tables is a statistic that is of special interest to investors and financial planners. And that is the life expectancy beyond the retirement age of 65. Once someone reaches the age of 65 statistics show that person is likely to live an additional 16 to 19 years. That number has, like life expectancy, improved steadily in the past several decades. Researchers predict that these numbers will continue to increase. So as we’ve learned to take better care of our physical selves and done what we can to extend the Golden Years so too have we learned to take better care of our financial selves. We can be assured that the years we’ve added on to our lives can be free of financial worry. How have we done that? Through a vast array of financial products, but, most notably through the use of annuities. A Definition What are annuities exactly? The best way to think of an annuity is to look at it as a savings account that you’re not supposed to use until after you’re retired. An annuity takes parts of two other financial tools—life insurance and retirement planning—and combines them into one versatile investment strategy. It features the guarantee that comes with a life insurance policy as well as the growth that comes with a retirement savings account. How It Works There are many different types of annuities but the one that is most appealing to people who want to have financial peace of mind after they retire is a life time annuity. A lifetime annuity is, first and foremost, about security. In this way, it is very much the most traditional of all the annuities. The investor, seeking security, pays an insurance company an amount, over time or all at once, that he believes will be sufficient enough to provide him income in his old age. Inherent in the agreement between the investor and the insurance company is the guarantee that no matter how long the investor lives he will be provided an income. In order to keep their side of the bargain, the insurance company takes the money that has been given to them by the investor and invests it high-rated government and

corporate securities. The earnings that accrue from these securities will help the insurance company pay back those investors whose life spans exceed the statistical norms determined by their actuaries. Over the course of time the insurance company knows that the money earned through the investment of its clients’ money will surpass the amount it pays back. Mutually Beneficial While there’s no doubt that the insurer benefits from the concept of the lifetime annuity, the benefits to the insured are quite substantial as well. In addition to providing guaranteed income for the investor for the remainder of his life, some lifetime annuities can have a death benefit as well. Should the investor die before he has received all of his initial investment, the remaining amount can be distributed to his beneficiaries. There are plenty of variations in the way in which the remaining amounts can be distributed. Who gets what and when is a question an investor can address in many different ways, which is also a source of comfort. When an investor decides to place his money in a lifetime annuity he is making a conscious choice to ignore the lure of potentially large earnings in exchange for stability. Many other retirement options—mutual funds, IRAs, 401ks—are subject to the whim of market forces whereas the fixed lifetime annuity is not. That being said, lifetime annuities can have just as many features as are available in other annuities with respect to contribution and distribution. The lifetime annuity is most closely related to a Fixed Annuity, an annuity meant to minimize risk and guarantee return. Slightly riskier is the Indexed Annuity and riskiest of all is the Variable Annuity. It may seem that a Variable Annuity and a Lifetime Annuity aren’t necessarily a good fit, but it’s important to note that one’s willingness to take on risk is not the same throughout an entire lifetime. Another great benefit of the Lifetime Annuity is that it’s an excellent match for investors who’ve just purchased an immediate annuity with either their own savings or as a result of rolling over their company-sponsored plan. They can take this money and spread it out over the course of their remaining years in the interest of guaranteeing income and financial stabilization. Taxes One of the great features of a lifetime annuity is that while wealth is being accumulated it isn’t being taxed. Unfortunately, that changes once the distribution of the money begins. The distribution will be comprised of both principal and interest, with the interest portion getting taxed at the rate of ordinary income. Even though income rates are probably lower in retirement than they were at earlier points, the rate of taxation is still higher than it would be on capital gains. Still,

annuities can offer tax advantages over other retirement vehicles like the 401(k), which gets taxed principle + interest upon withdrawal. Conclusion A noted financial adviser once said that annuities are kind of like the opposite of a life insurance policy. Whereas life insurance allows for financial security in the event of dying too soon, annuities allow for the financial security of living longer than expected. At some point we transition from worrying we’ll die young to worry that we’ll live too long. The lifetime annuity more than capably addresses this concern.

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