Now, what is a Fixed Lifetime Income Annuity?
A fixed lifetime income annuity represents a contract with an insurance company whose purpose is to convert part of your retirement savings (an amount you choose) into a predictable lifetime income stream. In return for a lump sum investment, the insurance company guarantees to pay you (or you and your spouse) a set rate of income for life. You can also have the option of starting your income immediately or sometime in the future.
Having the backing of an insurance company can help mitigate three key retirement risks that, generally, can be very challenging to manage by yourself:
- Market risk. Regardless of whether the market goes up or down, the insurance company is obligated to provide you with income payments every year.
- Longevity risk. Rather than trying to figure out how much of your savings you can spend each year before running out of money, the insurance company assumes the responsibility for paying you as long as you live.
- Inflation risk. By including an annual increase option, you can reduce the risk that inflation will diminish your investments’ purchasing power over time.
The trade-off with an income annuity is that you must give up control of the portion of the savings you use to purchase one. In return, you don’t have to manage your account to generate income, and you can secure a predictable income that lasts the rest of your life.
What’s more, fixed lifetime income annuities are often able to provide higher income payments than other products, such as bonds, CDs, or money market funds, due to the “longevity bonus” they can provide. While the payments from traditional income solutions are limited to return of principal and interest from an investment, fixed lifetime income annuities also make available the ability to share in the longevity benefits of a “mortality pool.”
Effectively, assets from annuitants with a shorter life span remain in the mortality pool to support the payouts collected by those with a longer life span.
Put simply, the longer you live, the more money you will receive.
Part C - What are Fixed Income Annuity's Payments and Features?