If you’re looking for ways to generate more retirement income, now may be the perfect time to consider an annuity. Payout rates for guaranteed lifetime annuities are currently at their highest levels in over a decade, according to Schwab.
While the higher rates may entice first-time buyers to purchase an annuity, those with deferred annuities can also benefit from the elevated payout rates if they haven’t already started receiving payments, Schwab writes.
Annuity Payout Rates Reach Approach 7%
An income annuity, also known as a single premium immediate annuity (SPIA), is an insurance product that delivers guaranteed income, often for as long as you live. Here’s how they work: you hand over a lump sum to an insurance company, and within 12 months, you’ll start receiving regular payments from the company on a monthly, quarterly or yearly basis.
The size of these regular payments is based on the payout rate of your annuity. The higher the rate, the bigger your checks are.
Culling data from immediateannuities.com, Schwab determined income annuities were paying between 6.5% and 7% in January – their highest levels since 2011.
An average single premium immediate annuity, for example, would pay the annuitant between $32,500 and $35,000 per year for no fewer than 10 years regardless of whether the person lives or dies during that period, according to Schwab.
For comparison, Moody’s AAA corporate bond yield was 5% in January.
Consider Annuitizing Your Deferred Annuity
While SPIA payments typically begin immediately – or within one year of purchase – deferred annuity payments commence at a later date. If retirement is still years away, you may consider buying a deferred annuity, which allows you to choose when your payments begin.
Rob Williams, managing director of financial planning, retirement income and wealth management at Schwab, writes that people who have already bought a deferred annuity may want to consider annuitizing now to capitalize on the higher payout rates.
“Certain investors who previously bought a deferred annuity – that is, an annuity promising to make payments at a future date, with the potential for tax-deferred growth along the way – which they haven’t ‘annuitized’ yet by converting it to income payments,” Williams wrote. “These investors could consider annuitizing their existing contract now or potentially even exchange their contract for a new SPIA, assuming they prefer the features and meet certain criteria …”
What to Keep in Mind
Annuities can help retirees meet their financial needs by supplementing investment income and Social Security benefits with lifetime payments. But like most asset classes, there are risks and pitfalls associated with annuities.
Here are a few things to keep in mind when considering an annuity:
Contracts are irrevocable. As Schwab notes, annuities are irrevocable. You’ll get a brief window to reconsider and potentially get your money back, but you’ll be locked into a contract after that.
Loss of control and liquidity. Once you hand over your lump sum, you’ll essentially lose control over the money. If an unforeseen expense suddenly arises, you’ll need to use a more liquid source to cover it.
High fees. You could potentially pay high fees and add-on charges for your annuity. These may apply if you want your spouse covered by the annuity or want additional features like a guaranteed minimum accumulation benefit (GMAB) rider.
You may not break even. If you don’t live long enough, you run the risk of falling short of your break-even threshold – the point at which the annuity pays out as much as it originally cost.
Payout rates on annuities are at their highest levels since 2011 – between 6.5% and 7% – according to Schwab. That may be a reason to purchase a single premium immediate annuity (SPIA) or annuitize a deferred annuity you already bought. While annuities can provide a lifetime stream of income, there are drawbacks to these insurance products including their irrevocability, high fees and illiquidity.
Tips for Buying an Annuity
- Before signing on the dotted line and purchasing an annuity, it’s important to understand how much income you’ll need in retirement to support your lifestyle. SmartAsset’s retirement calculator can help you estimate how much you’ll need and whether you’re on pace to meet your goals.
- A financial advisor can also help you determine your income needs in retirement, and guide you through the process of buying an annuity. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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