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How A Lifetime Income Annuity Works

Wednesday, March 6, 2013 - 7:29 AM
This CNNMoney.com article provides a good overview of lifetime income anuities (also called immediate annuities) along with some of the pros and cons.

From the article:
since you must give up access to the money you invest in an annuity, you don't want to put all your retirement savings into one. (There are annuities that allow you at least some access to your investment, but you'll receive less income and undermine the benefits of buying an annuity in the first place.)

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4
Ken TuminKen Tumin5,469 posts since
Nov 29, 2009
Rep Points: 125,077
1. Thursday, March 7, 2013 - 9:27 AM
I checked out that calculator using different ages and the younger you are the less you get.  Makes me wonder why any young person would even consider an annuity.  Basically it is like doleing out your own money to yourself especially if you are over 70 years old and you don't get to keep the principal.  Not my cup of tea.
3
paoli2paoli21,370 posts since
Aug 10, 2011
Rep Points: 6,004
2. Thursday, March 7, 2013 - 9:59 AM
Paoli2,

(1) The reason why the younger you are the less you get (i.e., the monthly income payments are lower) is because of the expectation that you would be getting the payments over a longer period of time. To some degree, you are getting a return of principal, but the income is guaranteed for the rest of your life. A bad deal for someone who dies prematurely, of course, but a good deal for someone who lives longer than the average life expectancy as calculated by the insurer. You should be aware that there are many types of annuities; this type is known as an "immediate annuity." Some of these come with riders that will guarantee a minimum payout, so that your beneficiaries will collect what remains should you die prematurely. The trade-off is a lower monthly income payment.

(2) I think the primary purpose of an immediate annuity is as a "safety net" to ensure that you don't outlive your assets. Think of it as "life expectancy insurance." People who have a traditional pension, and/or have savings generating sufficient income, probably wouldn't need it.

P.S. Frankly, I wish that instead of Social Security that the federal government had mandated a payroll deduction for the purchase of a fixed-rate annuity, which would be "converted" to a lifetime income annuity upon retirement. Of course, that would have meant that the federal government wouldn't have been able to borrow from Social Security.
3
WilWil242 posts since
Feb 26, 2010
Rep Points: 1,285
3. Thursday, March 7, 2013 - 3:50 PM
Wil,

I guess the "PS" of yours amounts to "privatization" of the Social Security. ... Right?  In any case, who would get the busines of government mandated fixed-rate annuity?  Private firms like .. New York Life? .. John Hancock? .. Pacific Life? What happens if/when such firms mis-manage their assets and go bankrupt?  Should the Government immediately  Bailout such firms?

... Nah ... situation could be like between rock n hard-place ... On one hand Government won't be able to borrow, but on the other hand Government will be implicitely responsible to step-in if/when the firms managing the annuity go under.

Perhaps giving control to the wage-earners via an IRA like account will be a welcome idea.

Personally I believe that programs like Social Security should be abolished. Each generation needs to look after itself, rather than depnding upon some "compact" between generations.  ;-)

Yours Truly,
- Anonymous
2
ytytytyt64 posts since
Feb 28, 2013
Rep Points: 197
4. Thursday, March 7, 2013 - 4:28 PM
YT: Yes, but I was speaking in the past tense; Social Security has been in place too long now to reverse it. But since you asked further, yes it could have been individual accounts administered by private insurance companies, and I see no reason why under such a system there couldn't be a federal guaranty program insuring those accounts, much like the FDIC insures deposit accounts. I agree with you, that unsustainable programs like Social Security need to be either thoroughly restructured or abolished, but I don't see the political will out there to make any meaningful changes. So it is all a moot point.
2
WilWil242 posts since
Feb 26, 2010
Rep Points: 1,285
5. Thursday, March 7, 2013 - 4:32 PM
YT:  I don't think programs like Social Security should be abolished.  The reason is that too many of our young people do not seem to take "saving" as seriously as we seniors.  They seem to have a "spend it while we have it" mentality.  If they don't have SS to depend upon, we will probably have a generation of Americans depending on the government when they are seniors.  It's difficult enough for those of us who did think to save and thank goodness with interest rates so low, we have Social Security for a back up.  What will it be like if they have no savings and no SS?  That is the kind of nation which breeds socialism and can become an entitlement society which is how Dictators become leaders of the society.  Somehow we have to find a way to teach the next generation to try to protect their futures by saving and doing whatever they can to keep our currency from being devalued.
2
paoli2paoli21,370 posts since
Aug 10, 2011
Rep Points: 6,004
6. Thursday, March 7, 2013 - 4:38 PM
Dear Wil,

Indeed ... this third-rail is too entrenched, and rather hard to change.

Hoepfully, it will go-under on its own in a few years/decades, and the future generations won't have worry about any "compact". More importantly, I hope that future generations will view this as a failed socio-financial experiment, and won't make a mistake of repeating any similar experiment.

Yours Truly,
- Anonymous
2
ytytytyt64 posts since
Feb 28, 2013
Rep Points: 197
7. Thursday, March 7, 2013 - 4:49 PM
Dear Wil,

Indeed ... this third-rail is too entrenched, and rather hard to change.

Hoepfully, it will go-under on its own in a few years/decades, and the future generations won't have worry about any "compact". More importantly, I hope that future generations will view this as a failed socio-financial experiment, and won't make a mistake of repeating any similar experiment.

Yours Truly,
- Anonymous

Amen!

But wouldn't it be better if instead of letting it collapse under its own unsustainable weight, we could plan an "exit strategy" in advance so that it could be gradually unwinded? Then, people who have contributed too much into it, and are counting on it, wouldn't be left with a catastrophic failure of all their plans.
2
WilWil242 posts since
Feb 26, 2010
Rep Points: 1,285
8. Thursday, March 7, 2013 - 5:22 PM
Dear Wil,

I have paid into Social Security for decades, but I expect by the time it will be my turn to get anything back, it won't be there. ... Sure if I get back whatever I've paid even without any adjustment for inflation, I'll appreciate that ... But my guestimate is that I won't get anything (or maybe something that will be peanuts).

Yes, an overally exit strategy will be a good idea.  My personal "exit strategy" is to consider every penny I pay into it, as a "penalty" and be done with it.  Penalty I pay, rather willingly, for the mistake my forefathers made.  I know that their intentions were good. They were doing what they thoght will be helpful rather than harmful.  Surely they could/did not see the future. I'm not good at that either!  (I hope that our future generations will be equally forgiving to us for the actions we've taken in the recent past, and will be taking in immediate future, which they might view as totally failed experiments.)

Yours Truly,
- Anonymous
3
ytytytyt64 posts since
Feb 28, 2013
Rep Points: 197
9. Thursday, March 7, 2013 - 6:56 PM
YT: I'm in the same boat (born in the final year of the baby boom), and I think that you are, unfortunately, completely right. We'll get shafted together. However, I won't mind being shafted as much if government employees were also, at the same time, to get much less than they were promised from their overly generous government pensions, which the federal, state, and local governments can no longer afford either.

P.S. If you are, indeed, right then in about 20 years don't be surprised when we see soup kitchens filled with grannies. Or maybe the "spiritual descendants" of Dr. Kevorkian will be set loose on an aging society -- soylent green, anyone?
2
WilWil242 posts since
Feb 26, 2010
Rep Points: 1,285
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