Frequently Asked Questions
- » Is living longer than life expectancy likely?
- » I already own a diversified portfolio of stocks and bonds. Why isn't that enough?
- » What sources of money can be used to pay premiums for annuity contracts?
- » Should I take a lump sum from my employer's qualified defined benefit plan and use the cash to buy an Income Annuity from an insurance company?
Is living longer than life expectancy likely?
It is much more likely than many people think. According to the Annuity 2000 mortality table relied upon by some insurance companies to price annuity contracts, for a husband and wife, both age 65, there's a 60% chance that one will survive beyond age 90.
I already own a diversified portfolio of stocks and bonds. Why isn't that enough?
Planning for secure retirement income, once you're actually retired (or nearing retirement) is fundamentally different than saving "for" retirement. There are advantages to adding fixed annuities that offer "protection" against asset losses and protection against market volatility and income for life.
What sources of money can be used to pay premiums for annuity contracts?
Premiums can be paid by check or wire transfer of funds from sources such as bank accounts, money markets, brokerage accounts, and 401(k) plans. Some transfers of funds may be tax free. For example, it's even possible to exchange a life insurance policy for an annuity contract without triggering a taxable event.
Money transferred from qualified savings sources (for example, IRA, 401(k), 457, and 403(b) plans) can be rolled over without triggering a taxable event. You can also transfer funds without triggering a taxable event from another annuity contract through a process called a "1035 exchange." Before you do, however, you'll want to check to see if your current annuity has surrender charges, and whether the benefits of the new annuity justify an exchange. Note, the new annuity may expose you to a new surrender charge schedule.
Should I take a lump sum from my employer's qualified defined benefit plan and use the cash to buy an Income Annuity from an insurance company?
The short answer is to always carefully consider the qualified annuity that may be available to you through your employer's plan, before taking a lump sum to purchase an individual annuity from an insurance company.
Why? Because the qualified plan annuity may be less expensive than an individual annuity due to lower administrative charges and different methods and assumptions used to calculate the annuity benefit. Also part or all of the qualified plan annuity likely will be guaranteed by the Pension Benefit Guaranty Corporation, a government agency.
Still, you might find an individual annuity attractive if (a) you desire to purchase your annuity benefits gradually, using a "dollar-cost" average* strategy after your retirement (since most qualified plans require that the annuity option elected begin as of one specific date, not several dates), (b) you desire to purchase inflation protection for the annuity, not always available from a pension plan, (c) you prefer a death benefit that is not available in the qualified plan, (d) after careful comparison, you find that an individual annuity is less expensive, or (e) you prefer the investment flexibility offered by the lump sum.
Note some qualified plans permit "partial lump sums." So, in these plans, you may elect to receive some part of your plan benefit in the form of a plan annuity and the remainder in a lump sum.
* Dollar-cost averaging does not assure a profit or protect against a loss in declining markets. It involves continuous investing regardless of fluctuating price levels. The investor should consider his or her financial ability to continue investing through periods of low price levels.
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®.