At some point or the other in life, each one of us faces the question of how to manage post-retirement income planning. The answer to this question is as varied as the types of plans and distribution options available.
A variety of factors affecting the retirement income include the type of retirement plan payout one expects to receive, personal savings outside of the plan, debt status, health issues, personal financial goals and post retirement employment.
The term annuity means a regular monthly income stream over a given time frame. Some employer retirement plans automatically offer benefits only in the form of an annuity, while others may just include it as an option upon retirement. However, virtually anyone can decide to buy an immediate annuity. Planning for an annuity has both pros and cons.
The advantages comprise of the promise of an income for life; security as annuity payments are guaranteed for life; flexibility that allows annuitants to customize their payouts; protection against inflation by providing for monthly payments that can increase with inflation; and simplicity of procedure. The disadvantages linked with annuities include limited guarantee since the guarantee of the monthly annuity payments is only as strong as the company behind it; inflexibility in terms of the decision to buy an annuity being usually irretrievable; illiquidity since once the annuity payments begin, lump sum withdrawals generally cannot be made from immediate annuity contracts; loss of purchasing power as the monthly benefit remains unchanged for the remainder of the annuitant’s lifetime; and low fixed returns.
There are different types of annuity payouts. The first is the single-life annuity, which is also known as a straight-life or life-only annuity. Such annuities pay benefits over the lifetime of a single annuitant. This form of benefit is essential to be the normal form of payment in employer defined benefit plans, but can also be found as an option in other types of plans and immediate annuity contracts. In employer retirement plans, the amount of the single life annuity payment is determined by the plan’s benefit formula. In insurance contracts, the amount of monthly payment depends upon the age and sex of the individual, as well as the amount of money available for the premium. The positive of this type of annuity is that payments are generally greater than found in any other form of annuity benefit but at the same time the negative aspect is that if the annuitant dies prematurely, the insurance company keeps the entire premium paid for the contract and pays nothing to the annuitant’s survivors. The second is the joint-life annuity, which is also known as the ‘joint and survivor’ annuity. This type of contract pays a monthly benefit over the lives of two individuals, usually spouses. Thus, it addresses the need for a monthly income for the life of a surviving spouse, no matter how long he or she may live. After the death of the first annuitant, the survivor receives a percentage of the prior monthly payment, which can range from 50 to 100 percent. However, the joint-life annuity payout results in a lower monthly payment than the single-life option since it pledges to pay over the longer of two lifetimes. There are also period-certain annuities that make guaranteed monthly payments only over a specified period of time. This type guarantees payments for a limited period of time and then all payments cease.
Annuity payouts are best suited for those who have no other choice in their employer’s retirement plan, cannot withstand investment risk, want to remain carefree about market instability, or those who have not amassed ample amount of retirement assets for investment income alone to provide a meaningful amount of annual income.
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