Income annuities now pay more than they have in years. With interest rates up, insurers can invest in higher-yielding bonds and thus offer income annuities with more generous lifetime payouts.
This has gotten little media attention. While it’s easy to find rates on certificates of deposit, bonds, fixed-rate annuities and money-market accounts, income annuities don’t carry an interest rate. But they do yield significantly more guaranteed income now than they did back in the era of very low interest rates.
Annuity buyers today have an opportunity to lock in more guaranteed lifetime income. Eventually, inflation will lessen, and interest rates and annuity payouts will decline then.
Lifetime income annuities = longevity insurance
Other financial products and investments promise to help investors and savers increase their wealth. Some provide current income, some don’t. But they all have cash value. You can sell them or cash them in soon or later. (Speculative investments can become worthless or close to it.)
Income annuities are different. Unlike other financial instruments (including other types of annuities), they normally have no cash surrender value. Instead, you’re buying a contract that guarantees current or future income. While you can buy an income annuity that pays income for a set period (such as ten years), lifetime annuities are by far more popular. They pay a set income for your lifetime (and the life of your spouse if you like).
The buyer deposits a single payment (premium) and in turn gets a guaranteed lifetime income. With an immediate income annuity, income payments will start anywhere from one month to a year after purchase. You also can choose monthly, quarterly or annual payouts. With a deferred income annuity, you get to choose when future payments begin (starting at least more than one year after purchase).
Both immediate and deferred lifetime annuities offer longevity insurance. They let you convert some of your savings into your own private pension. Most people choose a level payout, but you can choose to have income that will increase in the future—an option that has pros and cons.
How much income you can get now
John D. Doe, age 60, deposits $200,000 into a deferred income annuity, with level lifetime payments to start at age 70. It’s a joint annuity that also covers his wife, Jane J. Doe, also 60. Thus, the payments will continue also long as either spouse is alive.
He chooses the cash-refund option that guarantees that the premium payment will not be lost in the event of early death. If both he and Jane die before their income payments equal the amount of the annuity purchase, their beneficiaries will receive the difference.
With lifetime annuities, the 50% of people who die earlier than average subsidize the half who live longer than average. That risk-pooling is what makes lifetime annuities so valuable.
As of July 2023, one insurer will guarantee John and Jane $1,877.67 a month for life. This includes $1,075.90 in taxable income and $801.77 in nontaxable return of premium. About 21 years from the income start date, once the entire premium has been repaid, the payments will keep coming, though they will be fully taxable then.
I estimate that this couple will receive at least 20% more income than an identical couple would have received from an equivalent annuity bought a few years ago.
If John or Jane lives to age 90 and gets 20 years of payments, the total received will come to $450,640.80, including $192,424.80 of principal and $258,216.00 of interest. If at least one of them lives beyond 90, the benefits of the lifetime annuity will become even more compelling.
Lifetime annuities aren’t suited for everyone but most people planning for a long retirement should take a close look at them. Choose an insurance company that’s financially solid and able to meet its long-term obligations.
Ken Nuss is the founder and CEO of AnnuityAdvantage, a leading online provider of fixed-rate, fixed-indexed, and lifetime income annuities. He’s a nationally recognized annuity expert and prolific writer on retirement income. A free rate comparison service with interest rates from dozens of insurers is available at https://www.annuityadvantage.com or by calling (800) 239-0356.
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