You're ready for retirement, or close to it, and you've got to decide how best to use that 401(k), IRA or pile of savings you've accrued over the years. One option is to buy an annuity; but you're a little sketchy on the details and you've heard stories of seniors being taken in by overly complex versions that weren't suitable for them.
Never fear. The immediate fixed annuity is a relatively simple tool to guarantee yourself regular income after you retire. You pay a lump sum to the insurer and in return you get a monthly check until you die. I say "relatively" simple because you still need to calculate an annuity's internal rate of return since each payment returns some of your principal to you.
That means a $300,000 lump sum that brings you a monthly check for $2,000 isn't paying 8 percent a year, which would be a good investment indeed. No, the rate it pays depends on how long you live. If you only live another 12.5 years, you've effectively earned a zero rate of return. Live 18 years from age 65 (the average life expectancy) and you're earning 4.16 percent.
Even so, peace of mind is one of the benefits.
The main attraction here is that you're looking to produce a monthly cash flow you cannot outlive. The potential drawback is you drop dead the very next day. Because of that, you shouldn't invest all your retirement funds in a fixed annuity. Instead, he recommends committing 25 percent to 30 percent to an annuity if you need the reliable income when you are 65 to 70 years old.
Expect your age, prevailing interest rates and how much money you can commit to affect the payments. If you're committing a huge amount of cash you might hire a CPA to calculate the returns, but you can also simply shop around.
QuoteRetriever.com recommends using their online comparison shopping tool to find the best annuity for your situation. They offer rates and information from over 65 leading annuity carriers, online.
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