Hello everyone and welcome to our Income in Retirement chat. We have Kiplinger expert Kim Lankford on hand to answer your questions today. Let's give everyone a few minutes to get logged in.
Hi everybody! This is Kim. Thanks for participating in the chat today. I look forward to answering your questions!
Hi Kim! thanks for joining us. Do you think you could start out by just giving us a rundown on what options are out there for retirees, such as annuities?
There are a lot of options for retirement income, and annuities are the only way to guarantee that you won't outlive your retirement income. Traditionally, there have been immediate annuities -- where you give an insurance company a lump sum and it gives you a check every month or year for the rest of your life, no matter how long you live. But there are now many other options that guarantee lifetime income, too, such as variable annuities with lifetime benefits, which let you invest in mutual fund-like accounts and let you withdraw a certain amount of money every year for life, and the newer deferred-income annuities, where you invest a lump sum now, say at age 65, and the insurer promises to pay you a certain amount each year for life, starting when you're older, say in your 70s or 80s. Since you aren't getting the payouts until later, you'll receive much more each year than you would with an immediate annuity. So there are many lifetime income options for different needs.
That's a great question, and it depends on the type of annuity you get. With immediate annuities, the fees are embedded -- so when the insurer calculates the guaranteed payout, it's factored into the amount it promises. You can find a surprisingly large range of payout amounts for immediate annuities from company to company because of the fees and other assumptions that go into the payout calculation. Variable annuities show the fees separately. Some basic annuities have fees of less than 1.5% per year, but when you add on the lifetime payout guarantees, the fees can be 3% per year or more, depending on the company. Those lifetime guarantees boost the fees because the insurer is taking on more risk if your investments lose money. But several lower-cost insurers have entered the business and offer a version of variable annuities with lifetime guarantees with fees of about 1.5% to 2%. Their guarantees aren't always as robust as some of the other insurers, but it's a way to get a lifetime income guarantee without having to pay as much as people traditionally had to.
That also depends on the type of annuity you get. Now that there are so many different annuity options, it's important to shop around and make sure you compare fees and also understand how the guarantees work. Many insurers that offered variable annuities with lifetime income guarantees several years ago had to raise rates for new annuities because they had taken on so much risk, especially after the market downturn in 2008. Their newer versions of the annuities tend to have higher fees, smaller guarantees, and fewer investment choices (many now require you to invest in a balanced portfolio, rather than riskier funds). If you have an older annuity with lower fees and better guarantees, it's usually a very good idea to keep it. But people who are buying these annuities today may want to scale back the amount of money they invest in the annuities. Rather than investing a certain portion of your retirement savings, I usually recommend that people work backwards to calculate how much to invest: Add up your essential expenses in retirement, subtract your sources of guaranteed income (such as Social Security and any pension) and only get an annuity to provide enough income to fill in that gap. When you know you have guaranteed income for that amount of money, then you can invest the rest of your savings in other investments that may not have these fees.
JSMCO, Sue and rayoxbill -- you guys are on deck!
The problem with the first generation of index annuities is that many people didn't really understand what they were buying and how much it cost -- they often thought of them as getting the upside of the market without the downside, when the index annuities had caps on the index's returns or participation rates that they didn't realize. I do think that index annuity companies are doing a better job now of explaining to people that these are fixed annuities and that you aren't actually invested in the market, but that the interest that is credited to your account is calculated based on the performance of the market. Also, a lot of people didn't understand the fees of index annuities -- they'd see that a fee wasn't broken out like it is with variable annuities and they may think there are no fees, but the fees are embedded into the payout calculation, like with immediate annuities, so it's just calculated a different way. But I do see that some index annuity companies have been explaining how these products work much more clearly and making them more transparent, which can make a big difference.
Hi Rayoxbill, thanks for your question. I'm not totally sure about the three choices you're referring to -- are you referring to a variable annuity with guaranteed living withdrawal benefits, vs. an index annuity vs. an index annuity with living benefits? If so, then the decision depends on how much income the annuity promises when you will start to need the money, how the potential upside is calculated, and how much it costs for the guarantee. The variable annuities with the withdrawal benefits let you invest in fund-like accounts and promise that you can withdraw at least a certain amount each year for life, even if your investments lose money. The index annuities credit interest to your account by using a calculation based on the performance of a particular index, crediting you a portion of the S&P 500's performance, for example, or at least a minimum guarantee. And I believe the hybrids you're referring to are index annuities that give you guaranteed lifetime withdrawal benefits -- letting you withdraw a certain amount from your account every year for life, no matter how long you live.
We have time for one last question!
And, that's a wrap! Thank you to everyone who asked questions and a big thank you to Kim for fielding questions today.
Thanks for all of your great questions! It was good to hear from you, and gave me a lot of great ideas for future articles and columns, too!
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