Consumers who need a guaranteed, stable monthly or yearly income set up an immediate retirement account. Also known as annuities or income annuities, these accounts provide the owner and named beneficiaries with a systematic payment over a period of time. Payments consist of principal and interest and continue for the chosen term.
Several factors determine the monthly payout, including the annuitant’s age and gender, amount invested, current interest rates, payout duration, and whether the owner(s) would like the payment to be adjusted for inflation.
Pension conditions to choose from
One of the first options to determine is the duration of the income stream. A client may only need 10 years of revenue under a structured settlement or arbitration award. In this case, an initial deposit can be calculated to determine a guaranteed monthly payment for ten years.
In other cases, customers need a guaranteed income for life. This is known as an annuity and guarantees lifetime payments for the annuity(s). Life annuities are often structured to guarantee a period of time to ensure the return of the premium to the owner(s).
Life annuity with a definite term
For example, if a customer had an annuity with a fixed term of 20 years, the payment of the income would be guaranteed for at least 20 years in the event of the owner’s premature death. The remaining payments would be remitted to the policy’s designated beneficiary. Insurance carriers usually grant a certain period of up to 50 years. However, the longer the selected period, the lower the monthly payments will be.
An indefinite lifetime annuity offers the owner the largest monthly payment. This type of account is best suited for people who need a maximum monthly income but aren’t concerned about providing benefits to a beneficiary.
Inflation-adjusted income payments
Younger annuitants may want a payment that can be adjusted annually for inflation. The most common are accounts that increase monthly payments by a 3% or 5% interest rate annually. Monthly payments in the early years are smaller than an income annuity without an inflation tab, but increase significantly over time.
Income payments compounded at a desired percentage take into account the time value of money. A monthly payment of $1000 today will not buy $1000 worth of goods and services in 20 years. Inflation protection gives consumers security in old age, especially if they have invested in an annuity.
In summary, buying an annuity that is tailored to future needs requires careful consideration. Buying the best is just as important as choosing the term and inflation tab. With the help of an experienced broker, retirement income planning can be designed to meet a lifetime’s needs. It’s best to work with an agent who can provide quotes from several well-rated airlines, as payouts can vary significantly depending on pension parameters.
Learn more about retirement accounts.