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Wednesday, September 5, 2018

An annuity worth looking at (part 1)

Let me say at the outset that I am not a fan of annuities. I've seen too many that are impossible to understand even by those who sell them, involve egregious commissions and do not deliver what customers expect.

That said, there is one that I present to clients that is worth looking at. It can enable an investor to take more risk by increasing the allocation to stocks and at the same time reduce required minimum distributions at the age of 70 and a half. It is the "longevity annuity".

The longevity annuity is basically insurance against living a long time. Living a long time  is something we all want but it increases the probability that we run out of money. The annuity works like this: give an insurance company money today and the insurance company pays you an agreed upon sum in the future. Now go ahead and live to 110!

Here is a simple calculator provided online by immediate annuities that gives a simple example. You see I assumed 52 years of age, payout to start in 10 years, and a payment amount today of $130,000.

Hit the "Get My Quote" button and you find that the payout is, on average, $979/month.

You may be wondering why I chose $130,000. Simply this is the amount you can hold in an IRA and use to reduce required minimum distributions at age 70 and one half. Clearly those who are very risk averse and afraid of stocks can invest much more in this type of annuity.

So basically, this is very similar to social security and as such it enables you to take more risk, i.e. allocate more to stocks ( the third bucket for those using a bucket approach).

The usual caveats occur: check out the credit quality of the insurance company, look into insurance against bankruptcy provided by the state etc. As usual diversification may be in order depending on the commitment.

The next post will look at another example and look at a bit of basic math.

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