Do you know your annuities? Part 4

As we complete our first series I’m hopeful that the nitty gritty information I’ve detailed has helped you to understand the annuity products better. Understanding them is half the battle – selecting which ones work best for you is the other part to the equation. Since I am a crusader for the American saver I work day and night to assist you in building the toughest, most resilient nest egg for you and your family. In today’s day and age of immediate gratification it is only appropriate that we conclude the series with “immediate annuity.” Folks don’t want to wait for tomorrow when they can have it today. But keep in mind, right now isn’t always right.

Camilla Cat: Earl, tell me how an immediate annuity or IA works?
Earl E. Bird: Plain and simple, you give an insurance company a deposit and they pay you an income stream amount for a determined period or a lifetime. An immediate annuity is the simplest and most basic annuity product.

Camilla: Who buys an IA?
Earl: People in need of guaranteed income. Sadly, pension income is a thing of the past for most Americans so many are purchasing IA’s with their 401k or IRA rollovers for their income needs. An IA is perhaps the only product you can purchase that can lock in an income amount for the rest of your life.

Camilla: Wow! That sounds great. But does an IA offer any inflation protection?
Earl: Essentially, no is the answer. Ninety-nine percent of the IA’s purchased do not have inflation protection. Now, you can purchase a cost of living adjustment, which adjusts between 1 to 5 percent annually. However, you pay virtually dollar-for-dollar for that adjustment, which makes it really expensive to purchase.

Camilla: What percentage of my retirement funds should go towards an IA?
Earl: Because of the lack of inflation protection, I recommend having 20 to 30 percent of your portfolio in an IA for starters. If in the future you decide more guaranteed income is needed, I would choose to buy another IA with no more than 20 percent of my funds. Inflation should be a primary concern for the future so make sure you have some investments that keep up with inflation.

Camilla: Does my income stop if the insurer goes bankrupt?
Earl: Theoretically it could happen, however my sources say no IA consumer’s income has ever been stopped or adjusted as a result of insurance company bankruptcies.

Pay-it Forward:

Another term for income is cash flow. A positive cash flow means you are saving money and a negative cash flow means you are eating into your savings or using credit to pay your bills. To me, happiness is a positive cash flow. No car, house, furniture or electronics will ever make me feel happier than the security of having a positive cash flow.

Do You Know Your Annuity Products?
Part 1: Varied Annuity    Part 2: Fixed Annuities    Part 3: Fixed Index Annuities    Part 4: Index Annuities

Earl E Bird

I'm Earl E. Bird and I am very concerned about saving for my senior years. I am amazed at the stumbling blocks that exist when saving for retirement. That's why I take my time when making decisions on building my nest egg.

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