4 Important Risks at Retirements Solved By Annuities



Once you retire, you may think that you are done with risk. You can’t lose your job anymore since you don’t work. You can’t lose your house as your mortgage is most probably paid off by now. Then, there is not much to fear… or this is what you believe.


Unfortunately, there are several risks a retiree must face. Most of them are related to financial matters and can be solved with a little planning. For example, annuities can answer many of your retirement concerns. There are four risk annuities can solve at retirement:

 annuities and retirement

#1 Outliving Your Assets – You Still Live But Your Bank Account Died


One of the biggest risks at retirement is to spend all your money and still be alive. 50 years ago, when one retired, he had roughly 5 to 10 years to live. Today, you can retire as early as 55 or 60 and live until… 90! A life annuity could solve this concern quite easily. Since a fixed annuity is a guarantee stream of income until your death, you don’t have to worry about spending too much in your early days of retirement. You are set to receive the same pension forever.


#2 Loss of Spouse – Where Do You Find The Money?


We all know that living as a couple help cutting down on expenses such as rent, utilities and transportation. Once your spouse passes away, you are left to assume all expenses by yourself. This could be a problem if you haven’t planned it already. With a joint life annuity, you have the possibility of receiving the same pension payment after the first beneficiary deceases. Therefore, your budget is the same before and after your spouse passes away.


#3 Healthcare Assistance – How to Afford Nurse at Home


With aging population come healthcare growing needs. Several retirees prefer to stay in their home and require the help of a nurse from time to time. This is a good way to postpone your entry in a retired home. However, such service requires a good pension to afford it. This is where annuities come into play. If you purchase a longevity annuity, you will start receiving payments about the same time you may require healthcare services. This type of annuity is some kind of guarantee you can afford a nurse at home for a while and enjoy your place as much as possible.


#4 Inflation – What Used to Cost a Dollar


Inflation is definitely well hidden behind other retirees concerns. A small rise of 2% of your cost of living seems meaningless at first. But this is what makes a big difference if you enjoy retirement for the next 20 years. What used to cost a dollar will eventually double and this is true for most goods you purchase. Variable annuities allow the investor to increase its payment overtime. Since the investment return depends on the investment in the sub-accounts, you have better chance to match the inflation rate and keep your power of purchase intact during retirement.


Confused? Curious? You are looking for answers about annuities? Contact a trusted adviser that will take the time to explain you various options offered to you.

Insured Annuity Annuity

The insured annuity, also called back-to-back annuity, is a combination of two products: a life insurance and a fixed annuity. This product has been created for investors who seek both revenues and a guarantee of capital to be left to their heirs.

 insured back-to-back annuity

Back to Back Annuities Structure


As previously mentioned, the back-to-back annuity is a simple combination of a life insurance covering the amount used to buy a fixed annuity.

 insured back-to-back annuity structure

The idea behind this structure is to provide income to the investor while he lives and still protect his assets to be given to his heirs upon his death. The fixed annuity provides a steady stream of income to the investor. This distribution is used as a pension and also pays for the life insurance premium. Therefore, the net amount received by the beneficiary is smaller than a simple fixed annuity payment, but the capital used to purchase the contract remains intact upon his death. This strategy is used when the investor wants to make sure to leave something behind to his spouse or his children.


Main Advantages


Tax Efficient

As any other fixed annuity distribution, the insured annuity provides tax efficient revenue to the investor. Part of the annuity payment is considered a return of capital and therefore is not taxed. If an investor purchase an annuity at the price of $100,000 in exchange of payment worth of $7,000 per year, only a portion of this amount will be shown on his tax report as taxable revenue.


Income + Capital  are Guaranteed

The main advantage of this strategy is definitely to assure both a stream of income and the capital used at death. This product is 100% guaranteed from one way to another as both payments and amount at the end of the contract (death) are known in advanced and secured by the Life Insurance Company.


Better Return than CD’s

In order to appreciate the back-to-back annuity to its full value, an investor must compare it to a certificate of deposits where he would receive the interest but not the capital until maturity. In this case, the maturity is the death of the investor. The combination of the annuity return minus the insurance premium cost is considered to be the net annuity payment. Usually, the net distribution is higher than a certificate of deposit yield if both contracts are taken at the right age. There is a sweat spot between the actuarial calculation to price both annuities and life insurance premiums between the age of 65 and 75. This is always a case by case analysis you must do prior to enter into such contract.


Main Disadvantages


The Money is Locked-in

Once the annuity is purchased and the life insurance premium paid, it is not possible to withdraw more than the annuity payment (unless it is specified in the contract which would incur additional costs). You can always stop paying the life insurance premium and keep the fixed annuity, but you will lose the capital guarantee at the same time. While it is a good product to secure a part of your income at retirement, it is also wise to not invest all your money in a locked-in product.


Inflation Risk

If you purchase a sample fixed annuity, the payment will remain the same throughout the contract. If you happen to live a longer life than expected, inflation will gradually erode the value of your distributions. Since the money is not invested in the stock market, there are no ways for you to increase this payment.


Don’t Buy it Too Young or Too old

As previously mentioned, there is a sweat spot where the calculation for the back-to-back annuity is advantageous for the investor. If you buy it too young, the annuity payment will not be high enough to net a payment better than a certificate of deposit’s yield. If you buy it too old, the insurance premium will become too important to be paid by the annuity payment. Then again, your net investment return will fail to compete against a CD yield.


Final Thoughts on Back to Back Annuities


Since you have the option of securing both your pension payment and your capital you want to give to your heirs, the back-to-back annuity could be a great solution for a part of your nest egg. Its lack of flexibility makes the product inadequate to become the one and only source of income at retirement. Having said that, it is definitely worth it to have a talk with your adviser to see which scenario is best for your situation.

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