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Many people choose to convert their retirement accounts into an immediate annuity right after they retire. The reason is they are more comfortable having a guaranteed monthly income rather than watching their nest egg get reduced by monthly bills each month. The single premium immediate annuity is the perfect answer to wondering how much money you can spend each month during retirement.
By purchasing immediate annuities you can rest assured that you will have the income you need during retirement for as long as you live. The main benefit is simple; you cannot outlive your guaranteed immediate annuity. If you live another 100 years, you will still receive your guaranteed monthly check.
Most types of immediate annuities are kind of a gamble. If you assume your money will gain a modest interest rate, the immediate annuity provider will have to guess how long you are going to live. It’s really that easy, if you die before they expect you to, they make money, if you die after they expect you made a great investment. I know it sounds garish, but this is exactly how this type of annuity works.
Here is an example for a single premium immediate annuity I just sold a customer. The customer had just retired at age 67 and wanted to explore having a guaranteed monthly income. He had a pretty large nest egg, but was still concerned about outliving his money.
He was willing to part with $500,000 for the annuity. The single payment afforded him an annuity of $3,200 per month for life.
If he simply took $3,200 out of his retirement account every month and we assume a 5% interest rate, he would run out of money in roughly 23 years or at age 90. If we assume a 4% interest rate he would run out of money in 17 years or at age 84. His retirement accounts were invested very conservatively so the latter number is probably the most accurate.
Considering he is a very health guy and has never had a health issue, and has no family history of health problems, we estimated his life expectancy to be around 90. Thus, with his conservative investments every payment he receives after age 84 will be 100% profit. If he does in fact live until he is 90 years old, he would profit over $230,000 on his investment.
Let’s look at one more immediate annuity example to show you when the math doesn’t add up. Another client was interested in a single premium immediate annuity. However, her situation was much different. She just lost her husband and received a lump sum payment from the life insurance company of $350,000. She had no bills to speak of, she was 71 years old and has a heart condition. She also like the idea of having the guaranteed monthly income for life, but in her case the payments would only work out to $2,300 per month.
In her case, the breakeven point is 16 years or age 87. In other words if she took out $2,300 per month that she doesn’t need, she would run out of money at age 87. In this case, the customer did not feel she could possibly outlive the income she could get from her nest egg. Thus, I recommended she simply keeps the money and use it as required. This way if she was to pass before the money runs out, it will be distributed to her family. In this case, an immediate annuity did not make sense.
