Life Annuity Is There As Long As You Are

When people retire, they have many decisions to face. Among the most important is how to draw down one's retirement fund. Lump sum? Four percent or five percent per year?

If you want to be sure not to outlive your money, you can put your principal in a guaranteed account and choose to live on interest only, thus preserving principal. But, if you do that, you will not enjoy the dollars that you worked so hard to build for retirement.

You could take out five percent or six percent per year. But this might cause your fund to pass away before you do.

The only way to guarantee that you can maximize the benefit from your retirement fund and still be assured that it will be there at least as long as you are is though a life annuity. This column discusses only fixed annuities. Variable annuities are the topic for another day.

Such a fixed annuity guarantees you a certain income for life, regardless of how long you live. The amount that it pays is determined by your age at the starting date and the amount of money in the fund when you start.

In the annuity's simplest form, the payments stop when you die. Most people will say that this is too big a risk, that dying soon after the starting date will mean that the insurance company makes a mint at the expense of one's heirs. So, insures offer "period certain" annuities.

For example, "life with ten years certain" means that the annuity will be paid for life, but if you die within the first ten years of payments, the payments for the balance of the first ten years will be made to a beneficiary.

Most insurers have similar clauses based on five, 15 or 20 years, some even longer. The longer the guarantee of this sort, the lower the guaranteed payment will be. Typically, the 10-year-certain guarantee will reduce the payment by only a few percentage points.

It is also possible to guarantee income for two lifetimes. Thus, a man and wife can be assured of income for life. One can even tack onto that a period-certain, as explained above. Adding a second life will have at least a moderate affect on the size of the monthly check, but will be payable for a longer period - that is, until the second death.

Source: cincinnati.com - 04/19/2008