In my first career, decades ago, I worked as an announcer at a radio station in a small, rural town. One of my jobs included doing the emergency broadcast testing on a monthly basis. I can still remember what I needed to say during the test: “The attention signal that you just heard, had it been an actual emergency, would have been followed by official news or instructions. Remember, this is only a test.”
Let’s talk about the test of income. Someone recently asked us: “What is an immediate annuity?” You will often hear financial professionals talk about annuities. The annuities that they are usually referring to are called an accumulation annuity. Those are annuities where you are accumulating money inside the annuities. That could be an equity index or index annuity, a fixed-interest annuity, or a variable annuity. There are many different options available when a person is putting money into an annuity. What I am referring to is not the accumulation of money within an annuity. What I’m talking about is the payout of an annuity.
I actually went to my bookcase today and looked in The American Heritage Dictionary. It gave a pretty good definition of what an annuity is: “1. The annual payment of an allowance or income.” Think of it as your kids receiving an allowance; you are receiving an allowance of income. “2. The right to receive this payment or the obligation to make this payment.” Typically, a person or a company (usually an insurance company) is obligated to pay you on a regular basis. “3. An investment on which a person receives fixed payments for a lifetime or a specified number of years.” You should be very familiar with that structure of an immediate annuity. If you are a lottery winner, you receive a choice of receiving either a lump sum or payments throughout a certain period of time. That is an immediate annuity. If you have a pension program with our local brewery in town, Trane, or with the Wisconsin Trust Fund because you were a teacher or a municipal employee, that is nothing more than an immediate annuity. In fact, you can basically say an immediate annuity is often analogous or the same thing as a pension.
Payments from immediate annuities are quite unique. It can be based on the rate of return the annuity can receive from the investments put inside the annuity. It can be based on if you are a man or a woman. Men typically have shorter lives than women. Annuity payments to a woman are usually smaller because she is expected to live for a longer period of time or have a guaranteed payment for a longer period of time as compared to most men. Age also can play into it as well. Here is a great example: Social Security. We know the longer that we wait to receive the payout from the government for Social Security, the higher the payment will be. Some people elect to retire early thinking they’ll get more money than if they take the money later. However, everything else being equal, it is exactly the same amount of money as the person who waits and receives a higher payment. If they have the same life expectancy as someone who is younger and takes the lesser payment, it mathematically works out to be exactly the same.
You should make a decision based on things like what your health is like at that time. The longer you live with any pension, Social Security, or immediate annuity, the better off you would be. Then, based on the issuing company and the stability of the company, you should be able to have a payment with a lifetime immediate annuity that you cannot outlive. What you will typically find is a person in their 60s or 70s will begin having conversations around immediate annuities. The older a person is the more money they would receive on a monthly basis.
The important thing to realize is that everyone’s situation is unique. Everyone’s health is unique to them. The amount of money that they have is unique to them. When you are trying to decide if you should use an immediate annuity, you must remember that you are giving up the accessibility of money. You are trading that accessibility and purchasing an income, potentially guaranteed, for your entire lifetime.
If you have some specific questions about annuities or in this case immediate annuities, it’s important that you go slow. Take your time and see all the possible formulas that can affect your financial situation. If you have some additional questions regarding this or anything else, please reach out to our team.
“Annuity.” The American Heritage Dictionary, Houghton Mifflin, Boston, MA, 1991, p. 112.
