Retired researchers are often enthusiastic about annuities, but many consumers are reasonably skeptical. Here to discuss basic information on annuities and their advantages and disadvantages is Christine Benz, director of personal finances and planning of Morningstar’s retirement.
This interview has been modified for duration and clarity.
Q: How do income for income work and in what they are different from investment in something that pays income such as obligations?
A: An annuity is a contract with an insurance company. In the most fundamental type of annuity, annuities, you give the insurance company a basin of your money and they send it back as a flow of income during your life. These types of products give you more income than you could not win by investing in an obligation.
They do this because you benefit from the annuity by what is called “pooling of the risks of longevity”, which means that some people who buy this same rent will die earlier, which widens payment for the whole group of you. If you are the one who lives to be 99, you are the winner of this situation. This is one of the reasons why payments are higher than you would see for traditional fixed income instruments. The other great reason is that if you buy an annuity, your money has disappeared, effectively. You get cash flows, but you cannot recover your director. On the other hand, when you buy an obligation, you receive income, but you receive your director at the end.
Q: How can these types of annuities help retirement planning?
A: These very fundamental income annuities can be useful in terms of the fight against the basic subsistence costs of a household. Let’s say that my basic household expenses – housing, taxes, health care – total $ 40,000, and social security will give me an additional $ 30,000 on these $ 40,000. I could buy an annuity which will provide me $ 10,000 per year to meet these basic cash needs. It is an elegant use of an annuity, and it can help retirees to determine how much they would like to put in such a product, by examining how much they really need it.
Q: Savings annuities, or “deferred annuities”, allow investors to obtain exposure to the market in addition to income. What are the types of key savings annuities?
A: The most familiar is a variable annuity where you control investment allowances. There are also increasingly popular “fixed” annuities, where you get an exhibition at the market, but there are ceilings on your earnings. There are also ceilings on your losses. The annuities linked to the recorded index are between these two types of products on the risk spectrum.
Q: These products are more complicated than income annuities, and have more risks and higher costs. How can investors make sure they know what they get started with these products?
