The Value of a Fixed Annuity

How much would you pay to get $100 more a month in retirement income for the rest of your life? On the flip side, how large of a lump sum would it take for you to give up $100 a month in retirement?

In theory, those two numbers should be the same. However, a 2015 study found that participants, on average, were willing to spend only $3,000 to buy the extra $100 benefit, but would sell it for no less than $13,750.

The responses to this survey demonstrate how difficult it may be to grasp the value of a fixed annuity. In essence, you purchase an annuity contract with up-front cash, known as the initial premium, in exchange for guaranteed income for a set period of time or for the remainder of your life. Some people may believe relinquishing a portion of their retirement assets for a future benefit is too big of a price to pay. However, you might also consider the risk of not having enough income in retirement, or running out of money too soon.

For this reason, it may be helpful to sum up a few of the benefits that a fixed annuity is designed to provide:

  • Retirees must gauge how much income to withdraw from savings sources each year so they don’t ultimately run out of money. Even with careful planning, unexpected expenses can throw this measured strategy off course. Another problem, too, is that some retirees do not live as full a retirement lifestyle as they would like — even if they can afford it — for fear of outliving their income. A fixed annuity can help provide more certainty with a guaranteed (by the insurance company) retirement income stream.
  • A fixed annuity provides reliable income regardless of what is going on in the stock and bond market, so a portion of a person’s retirement assets are not subject to market volatility.
  • A fixed annuity is a guaranteed source of income, which can be particularly appealing to retirees who do not have a pension. Annuity product guarantees are backed by the financial strength and claims-paying ability of the issuing insurance company.
  • Fixed deferred annuities can be held until a later age in retirement, when a person may be more likely to encounter higher medical and assisted care bills. About the time many retirees start running low on funds, a deferred annuity can provide a new stream of income.

Annuities are insurance products that may be subject to fees, surrender charges and holding periods which vary by company. Annuities are not a deposit of nor are they insured by any bank, the FDIC, NCUA, or by any federal government agency. Annuities are designed for retirement or other long-term needs. 

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