Five Things to Know about Annuities
By Saghir Aslam
Rawalpindi, Pakistan
(The following information is provided solely to educate the Muslim community about investing and financial planning. It is hoped that the Ummah will benefit from this effort through greater financial empowerment, enabling the community to live in security and dignity and fulfill their religious and moral obligations towards charitable activities)
There’s a lot to love about having a guaranteed source of income for life. It gives you protection against running out of money and a greater ability to ride out the stock market’s up’s and down’s. It might even lift your mood: Research has found that retirees with a predictable source of funds, such as social security or a pension, are happier than retirees who don’t have guaranteed income. Don’t have a pension? What additional regular income beyond that you can get from social security? That’s where annuity comes in. here are five things you need to know before you buy one.
- They’re simple –and complicated
Stripped to the basics, an annuity is a deal with an insurance company. You turn over a sum of money; in exchange, you collect guaranteed income to help with your retirement. The size of your monthly check is determined largely by your age and sex, and interest rates when you buy the annuity. Now, for example, a 65-year old man paying $100,000 for a single premium immediate annuity (also known as a lifetime annuity) could get about $565, a month for life; for the same amount, a 65-year old woman payout’s lower because of their longer average life span.)
But annuity isn’t all basic. They come in many varieties-variable, fixed, equity indexed and more. Some can help defer taxes; others can allow people to invest in stocks and bonds while protecting again steep losses.
- They require a commitment
As nice as guaranteed income is, you may balk at trying your money up in an annuity. “The one thing that consumers get about annuities in that you’re handing your money over to someone,” says Jamie Hopkins, director of retirement research at Carson Group, a financial advice firm. “And the single biggest thing people don’t like is giving up control.” That 65-year old man, if he lives to 90’s, will receive nearly $ 170,000 over the years in return for his $100,000. But if he were to die at 70, he would have collected a total of about $34,000, and any heirs would get nothing. Avoiding that outcome is possible –at a price. The man could buy a lifetime annuity guaranteed to payout for at least 15 years, even he dies before then. In that case, his beneficiaries would collect for the reminder of the 15 years, but the annuity’s monthly payout from day one would be lower than that of a lifetime annuity without that guarantee.
Even a willing commitment has hazards. Money spent on an annuity is money you can’t get at, or can access only at great expense, in an emergency. Steve Vernon, author of Retirement Game-Changers, suggests putting only enough in a single premier immediate annuity and social security cover your basic living expenses. “Invest the rest of your money,” he says, and draw that down systematically to spend on travel, hobbies and spoiling grandkids.”
(Saghir A. Aslam only explains strategies and formulas that he has been using. He is merely providing information, and NO ADVICE is given. Mr Aslam does not endorse or recommend any broker, brokerage firm, or any investment at all, nor does he suggest that anyone will earn a profit when or if they purchase stocks, bonds or any other investments. All stocks or investment vehicles mentioned are for illustrative purposes only. Mr Aslam is not an attorney, accountant, real estate broker, stockbroker, investment advisor, or certified financial planner. Mr Aslam does not have anything for sale.)
