Protecting Assets & Increasing Income
How Immediate Annuities Increase Income
To understand this, consider two retirement income plans for a husband and wife, both age 65:
- Income Plan A follows the "4% rule", explained in Planning Retirement Income. So, from assets of $100,000, the rule allows the couple to withdraw $4,000 a year plus annual inflation*, for life.
- Income Plan B pays a $100,000 premium to purchase an immediate annuity for life. The couple also chooses to include an inflation rider in their annuity. This option increases the income from the annuity, each year, for annual inflation*. Based on rates available in August 2008, this annuity provides annual income of $5,500 plus annual inflation* guaranteed for as long as the husband or the wife may live.
In this example, the immediate annuity increases the income plan by 37.5% (or $1,500 plus inflation*). For a single female or single male, the income advantage is even higher. This is because the annuity payments are higher if one life is covered instead of two.
Our couple could also combine Plan A and Plan B. For example, they could keep $50,000 in Plan A and purchase an immediate annuity with the other $50,000. In this case, their total income would be $4,750 plus inflation*, an increase of 19% compared to Plan A alone.
* Inflation adjustment = annual growth in cumulative CPI-U
How Fixed Deferred Annuities Protect Assets
A fixed deferred annuity is designed to help protect long term savings from losses due to market performance. It operates by crediting interest to the premium you pay. Interest rates vary from company to company. A fixed deferred annuity typically does not produce lifetime income payments unless and until you elect for it to do so. Some deferred annuities allow withdrawal without conversion to lifetime income payments.
In brief, here's how a fixed deferred annuity protects retirement assets:
- Guarantees a fixed rate of interest for a period of time, based on the claims paying ability of the issuing insurance company
- Taxes on interest credits are deferred until withdrawn
- Permits tax deferred conversion (called annuitization) to a life income plan
Note: Information provided in the Planning Retirement Income tab is representative of the views of ELM Income Group® and not necessarily those of any member of the Principal Financial Group®.