私の父と祖父は、いずれも安心できる引退生活を謳歌しました。彼らは、生きている限り毎月小切手を送ってくる退職プランを提供している組織に勤めていました。私は、このようなプランのない企業で働いてきました。現在働く多くの他の人たちと同様に、私にも401(k)プランが提供されました。雇用主が拠出金を出し、私も拠出し、これらを合わせて何年もかけて配当金と金利で増加する仕組みです。間もなく私は退職しますが、どうしたら自分の401(k)プランにある資金で確実に私の余生を賄うことができるでしょうか。
毎年いくらなら「安全に」引き出すことができるかについては、多くの提案や調査がありますが、自分が死ぬまでその資金が尽きないことは保証できません。資金が尽きずに過ごせる確率を上げるために、つつましい生活を送ることもできるかもしれません。一方、十分な資金があれば自分の人生を豊かにできるアクティビティや機会を見逃したくはないはずです。見逃されがちで、むしろ恐れられている代替案があります。自分で貯めた資金の一部を使い、自分の父や祖父のように毎月の収入保証を与えてくれる個人年金を購入するのです。
What is an annuity?
One complaint about annuities is that they are so complicated, but they don’t have to be. At its core, an annuity is an agreement with an insurance company. You would agree to make a premium payment to the insurance company of a specified amount, and the insurance company would promise to give you a specified monthly income until you die. You can also choose to cover your spouse or other beneficiary if you want, but the monthly payment will be a little smaller to pay for that extra coverage. Annuities can have other fancy guarantees and cool features, but those extra benefits come at a cost, increasing both the complexity and the price of the annuity. For this discussion, let’s consider simple annuities that pay a fixed amount for your life and may also cover your spouse.
But what if you die soon?
The other primary complaint about annuities is that you may pay lots of money and then die “young” without receiving much in return. That is true, it could happen, but was your money just lost? Remember, an annuity is an insurance product. It works like health insurance. You might pay health insurance premiums and not get sick, and not need to see a doctor. Was it a waste? No, you still received the peace of mind that if something happened, you would get some financial assistance to see you through. It works like fire insurance. You pay fire insurance premiums with a hope that you never receive a single dollar back from the insurance company, as that is better than having your house burn down. What did you get for paying your premiums? Peace of mind, or an assurance that if something happens you can get some help, without being a burden on others.
In each case, the insurance company tries to find people that want to band together in a sort of brotherhood. You know someone in the group will get horribly sick and their treatment will cost a lot of money, but you don’t know who. Someone’s house is bound to burn down in a tragic accident or in a wildfire. You hope it isn’t you, but everyone in the insurance company’s “brotherhood” pitches in some money so that whoever is affected will be able to get some help when they need it.
The same is true with annuities. The insurance company brings people together. Some will live a long time, others just a short while, but you don’t know how long each person will live in advance. Nobody wants to run out of money because they lived a long time and all participants pitch in some funds to help the person(s) that ends up living longer. You might be the one that dies sooner, and the remainder of your money goes to help those that live longer, but you still have the peace of mind. You know that if you do live a long time, you will get that monthly payment until you die, and you won’t be a financial burden to your loved ones, or to society.
Will your heirs receive anything?
Well, that depends on how you look at it. There are more complicated annuities that provide a minimum amount at death. For the simple annuities spoken of here, the short answer is that no monetary payment will go to your heirs. That doesn’t necessarily mean they receive nothing. While it may be intangible, your heirs also receive peace of mind. They can make plans for their own lives, knowing that you will get a monthly check until you die. As long as that amount is sufficient, together with Social Security and other savings you may have, you won’t end up on their doorstep asking them to provide for your future.
When should your annuity start?
This is a matter of personal preference. If you are retiring with a lot of money in your 401(k) and you have neither the expertise, nor the interest in investing it for the future, you may want to take the majority of your savings and convert it to an annuity that starts immediately at your expected retirement. Alternatively, you could take a smaller portion of your savings and purchase a “deferred” annuity that starts at age 75, 80, or 85. You will then know that your savings must last until the age chosen for annuity commencement. This can give you the best of both worlds, with flexible income in your early retirement years when you are more active, coupled with the added protection of guaranteed income in your later years.
Another way to think about when your annuity should start is through a frequently mentioned guide for insurance: You should insure the outcomes you can’t overcome on your own. I once had a toaster that burned up. It stayed on too long and ignited an expected tasty pastry. I had no insurance for the toaster, but that was ok because I could afford to buy a new toaster. If you decide to manage your own investments in retirement, and at age 70 it looks like you will be short of money, you could probably pick up some work to help make up the difference. If you are age 80 or 85 when you realize you will be short of money, what will your options be? You hope you are still healthy, both physically and mentally, but getting a job may not be realistic. It makes sense to insure against this outcome in some way, because you won’t be able to overcome that on your own.
When should you buy your annuity?
For a given amount of money that will be used to purchase an annuity, the size of the resulting monthly income will be highly dependent on two things:
- The age at which payments commence. If monthly payments do not start immediately, the insurance company is able to invest your premium and help it grow until the time that payments begin. Furthermore, since you will be older, the monthly payments will be made for a shorter period. These factors will increase the amount of your monthly benefit, relative to purchasing an annuity that starts immediately. Alternatively, you can continue to invest the money yourself and purchase an annuity when you want payments to commence.
- The interest rate environment when you make the purchase. The insurance company will take your payment and invest the money until it’s paid out. They will look for secure investment opportunities available at the time of your purchase like bonds or Treasuries. As a result, if you are looking to purchase an annuity that will provide you with $1,000 per month for the rest of your life, then low interest rates will lead to a higher annuity purchase cost when compared to a higher interest rate environment, because the insurance company will make less money on their investments. If you had a crystal ball and knew which way interest rates were headed, you would know if there could be value in waiting or if you should go ahead and purchase now. Unfortunately, rates right now are relatively low, but they could go even lower; you just don’t know. One option might be to split your intended annuity purchase money and buy a portion now and another part later. This way your investment isn’t all locked in immediately, but remember that interest rates could go down, or the withheld portion that you are investing on your own could lose value before your later purchase. There are no guarantees.
What if your insurance company goes bankrupt?
That’s a fair question, and you certainly want to purchase your annuity from a solid insurance company, but what if? Insurance companies are highly regulated and are required to keep a certain level of investments on hand to cover their liabilities. Government regulators will not wait until the money is completely gone to insist on some sort of change. If an insurance company is struggling, it could be that another company would step in and purchase them, taking over their assets and their obligations. In addition, each state has a “guaranty association” to protect annuity recipients if an insurance company fails. There are limits that vary by state. If your annuity is large you may not receive the entire payment, but you would have some protection. You could also reduce your exposure to a single insurance company by purchasing annuities from different insurers, and all your eggs wouldn’t be in one basket.
Is an annuity right for you?
I have tried to explain the benefits of an annuity and dispel some common misperceptions about them, but should you buy one? That depends on a lot of factors, and you would be wise to consult with your tax, investment, and/or legal advisors. There are tax implications that are not covered here, and I don’t know what other options may be available to you personally. Still, if you want the peace of mind that your money will not run out, or want that assurance for your spouse, an annuity may be a great way to go. It is a little late for me to benefit from the type of retirement plan my father or grandfather enjoyed, but buying an annuity might be the next best thing.
Caveats and limitations
Bruce Mitton is a consulting actuary at Milliman. The above material represents the opinion of the author and is not necessarily the view of Milliman. The ideas expressed are intended to show some of the benefits of purchasing an annuity, but all readers must evaluate their own situations and not rely on this material. Through publication of this information we assume no duty of liability to any reader, each of which is encouraged to seek the assistance of their own tax, investment, and legal advisors.