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Does an Income Annuity Make Sense for You?

Possible Solution. A joint and survivor annuity will continue payments to a survivor. Of course, this will reduce the payments, but that may be a small price to pay in exchange for both of you receiving payments for life. One decision you'll have to make from the get-go is whether or not to reduce the survivor’s benefit. Since there will be one less mouth to feed, it may make sense to reduce the benefit to, for example, two-thirds of the original payment amount. It all depends on your unique situation. You have to look into the veritable crystal ball to determine what your financial situation may be years, if not decades, after you begin receiving the annuity. This is an important task.

Drawback Number 3: Inflation ravages the annuity’s purchasing power. Inflation can wreak havoc on a fixed annuity. In short, while $1,500 per month in annuity income, in addition to your Social Security and other income, could look mighty appealing when you retire, you’re quite likely to see the purchasing power of that $1,500 chopped by half or more, even if inflation stays relatively low.

Possible Solution. Insurance industries are  more than happy to sell you an annuity with an inflation kicker. The trade-off is, you’ll receive considerably reduced initial payments in comparison to a fixed annuity without the inflation kicker.

If you’ve got longevity in the family, you may find comfort in an annuity that increases payment in accordance with the actual rate of inflation or one that rises by a fixed percentage each year. But if you’re frightened by the possibility of persistently high inflation after you retire, you can put the onus on the insurance company by taking payments that are adjusted more closely with the actual rate of inflation, generally as measured by the consumer price index (CPI). Variable income annuities can also provide a rising annuity income if the value of the underlying mutual funds in the annuity rise in value.

Because of inflation, a dollar today is worth more than a dollar in the future. Here’s what happens to the purchasing power of a fixed annuity that provides an annual payout of $18,000, assuming inflation averages 3 percent:

Years Hence Annual Payment Purchasing Power
5 $18,000 $15,500
10 $18,000 $13,300
15 $18,000 $11,400
20 $18,000 $9,800
25 $18,000 $8,400
30 $18,000 $7,200

Drawback Number 4: The insurance company dies before you do. The likelihood of an insurance company bellying up is very low. But as the statisticians like to observe, "Events of zero probability happen all the time." The last thing you want to do during your retirement is to lose sleep over some insurance company’s financial travails.

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