“I don’t have a pension. I’ve heard about annuities for lifetime income. Can you explain my choices?”
-Question from: Mary B, St. Paul MN
Information is from the booklet on annuities produced by The Actuarial Foundation and Women’s Institute for a Secure Retirement:
An annuity lets you convert all or part of your retirement savings to a guaranteed stream of lifetime income. This gives you the security of knowing that you will continue to receive money each month for the rest of your life – even if you live to be 100 or older. The insurance company takes on the risk of figuring out how to make the money last as long you will live, so that you don’t have to worry about it.
How They Work
You can buy an immediate annuity with funds available from a 401(k) plan, IRA, savings account, life insurance policy, inheritance, or the sale of a home.
An insurance company that you select invests the money and makes regular payments, either by check to you or by automatic deposit to your bank or financial institution. You can choose how often you receive a payment: every month, quarter, half-year, or year.
The amount of income is based on the amount of money that you have to buy it, plus a number of factors including your age, sex, income option selected, and interest rates at the time of purchase.
What forms of annuities are available?
An optional form of pension or annuity can include lifetime benefits for a survivor, or can guarantee payments for at least a minimum period such as 10 years if you die soon after payments begin.
The table below outlines several annuity options that are commonly offered, and gives an idea of the amount of the benefit for each option. These examples use a $100,000 payment for a 65 year old couple. These figures are based on 6% interest and representative mortality. Your actual income may be different.
- Lifetime Income (also called Life Income or Life Only): Pays you income for the rest of your life, and then the payments cease. Monthly income on $100,000 payment: $794 per month for life.
- Life With Period Certain: Pays you income for the rest of your life. If you die before the “period certain,” often 10 years, your beneficiary will receive the balance. Monthly income: $754 per month for life, 120 month minimum.
- Life With Refund Certain: Pays you income for the rest of your life. If you die before you receive the amount you paid in, your beneficiary will receive the balance of the amount paid in. Monthly income: $743 per month for life, 135 month minimum.
- Joint and Survivor: Lifetime income for two people. At the death of one person, the survivor will receive a percentage of the original amount, for example, 50% or 100%. Monthly income: $646 per month as long as one person is alive, under the 100% option.
This is general information and should not be used as a substitute for legal or professional advise
The Actuarial Foundation, a not-for-profit, was established in 1994 to develop, fund and execute education and research programs to serve the public using the talents of actuaries.
WISER, a not-for-profit,was established in 1996 to improve the long term financial security of women through education and advocacy.