You Get an Income For Life
So You Won't Outlive Your Savings
Life annuities, considered here, are different from annuities designed as a tax-favored way to save.
No one knows how long they will live. But if you have “average health,” your chances for a very long life are excellent. Life annuities are designed to help pay the bills however long you live.
Odds that one person in a married couple, both 62, will live …
If you buy a life annuity
- You get an income for life.
- The savings used to buy the annuity are gone and can no longer be tapped in emergencies or left to your children.
Different Types of Life Annuities
All Pay an Income for Life, But Some Pay:
- A “fixed dollar” amount, say $300 a month. But inflation will reduce what your $300 could buy. If prices rise 3% a year, in 20 years $300 could buy barely half what it could today.
- An amount, say $300 a month, that rises with inflation. If prices rise 3% a year, so does your monthly income, just like your Social Security benefits. These annuities cost more than “fixed dollar” annuities. But tomorrow you’ll have enough dollars to buy what you can buy today.
- An attractive alternative to buying such an annuity is to use your savings to delay claiming Social Security, and claim a higher benefit when older. Think of the savings you use as the price and the increase in your benefit the annuity you buy.
- An income guaranteed for a minimum number of years, say 10. If you don’t like the prospect that you buy an annuity and die “too soon,” this annuity assures your heirs a minimum “return.” But the guarantee isn’t free – it comes at the cost of a lower monthly income.
- An income based on investments in stocks. Most annuities invest your savings in bonds. But some invest your savings in stocks, which have higher expected returns than bonds. The income such annuities provide is expected to rise. But there’s no guarantee. Stocks are risky and your income could also fall — perhaps quite a bit — but your income won’t fall to zero.
- An income that begins much later in life, say at age 85. Much of the risk of outliving your savings is the risk of living to an advanced old age. Annuities that begin paying an income much later in life protect against this risk — and cost much less than annuities that begin immediately.
The Uses of Annuities
Should Annuities be ONE Way to Use Your Savings?
Very few families should buy annuities with all of their retirement savings. But should you buy an annuity with some of your savings?
- The more you need regular income that will last as long as you live, the more valuable annuities become.
- The more you value controlling your savings – as reserves for a rainy day or to invest in the market for potential gains – the less valuable annuities become.
To see how annuities might help you use your savings, see our Figure Out How to Get Income from Retirement Savings.