Retirees have always worried about running out of money and becoming dependent on others. Today, most are more anxious about it because interest rates are so low.
The days when you could get a decent stream of income from Treasury bonds and certificates of deposit are gone. That doesn’t mean that Treasuries and bank CDs aren’t options. But you can no longer rely on them exclusively.
Furthermore, many companies have done away with traditional pension plans that used to protect retirees. Social Security is invaluable, but it makes up only 40 percent of the average wage earner's pre-retirement income.
A study by The Wall Street Journal several years ago found that retirees who have a guaranteed monthly income for the rest of their lives are happier than those who don’t. They also live longer on average.
So, how can you get more guaranteed income to remove the financial worry from retirement?
How to create your own pension
It’s simple: create your own pension. A lifetime annuity produces guaranteed lifetime income, like a traditional pension. Many insurance companies offer them.
You can make a one-time cash payment to buy an annuity. Alternatively, you can roll over the funds from an IRA, 401(k), or other retirement account. Either way, you’re buying a single-premium annuity. Or you may choose to make a series of smaller regular deposits to a flexible- premium annuity.
A lifetime annuity hedges against the financial risk of living a very long life. Independent experts and economists say most people should allocate a significant portion of their savings to this type of annuity. The right amount depends on your circumstances.
Tax advantages
A deferred income annuity combines a future stream of income with tax-deferral since you pay no taxes until you begin receiving income. Even then, the payments you’ll receive (unless from an annuity in an IRA or other retirement plan) are only partially taxable because some of the income is considered a nontaxable return of premium.
A deferred income annuity postpones income payments until a future date that you choose. Most buyers choose to start taking payments when they turn 80 or older.
You’ll know the exact amount of monthly lifetime income you’ll receive and the exact date when it begins. You can buy either a single-life annuity or a joint-life annuity, which typically covers both spouses.
It’s the most efficient way to protect against outliving your assets—whether you live to 88 or 98 or 108.
The power of the approach results from two things. First, the insurer invests your money for many years, enabling it to compound until you begin receiving income. Second, buyers who do not live to an advanced old age in effect subsidize those who do. That’s the magic of insurance.
The longer you delay taking payments and the more advanced age you start taking them, the greater the monthly payout.
A different way to plan for retirement income
The deferred income annuity, sometimes called a longevity annuity, offers a different way to plan for retirement.
Let’s say you’ll retire at 65. You can use part of your money to buy a longevity annuity that will provide substantial lifetime income starting at 85, for example. Then, with the balance of your retirement money, you only need to create an income plan that gets you from 65 to 85 instead of indefinitely.
Also, you might be able to delay taking Social Security and thus get bigger payments later on.
You won’t have to deal with the uncertainty of trying to make your money last for your entire lifetime. And since you know you’ll have assured lifetime income later on, you can feel less constrained about spending money in the early years of your retirement.
Another option is to buy an annuity within an IRA—a qualified longevity annuity contract (QLAC). QLAC is an income annuity that meets IRS requirements. Over your lifetime, you can allocate 25% of the total of all your IRAs or $135,000, whichever is less, towards the purchase of a QLAC. In future years, the $135,000 limit will be adjusted for inflation.
It lets you defer up to 25% of required minimum distributions and thus reduce your taxes until payments begin. Unlike other annuity income, QLAC income is 100% taxable, but it’s money you’d eventually have to withdraw from your IRA anyway.
Lifetime annuity income reduces retiree anxiety and promotes wellbeing. You can create your own pension.
This article originally appeared at HCPLive.
