For most people, the possibility of outliving their money during retirement is of primary concern. If you find as you begin to plan for your retirement that you want or need additional guaranteed monthly income to supplement your Social Security and any pension benefit you may receive, you most likely are in process of researching income annuities. And it pays to be careful when purchasing one.
In addition to their traditional use, income annuities can also be planned, structured and used for multiple reasons, such as purchasing and holding the income annuity for future utilization to help cover the continued cost of long-term-care assistance or for supporting the potential income requirements that may come about to aid in maintaining residential/assisted living costs for one or both spouses.
It is important to remember that annuities are legal contracts. Once an annuity contract is issued and delivered to the purchaser, there is a free-look period mandated by the state where the annuity was purchased. This free-look period is standard with all annuity contracts, however, the length of the free-look period can vary, usually between 10 to 30 days, depending on state regulations and the issuing insurance carrier.
Once the free-look period has expired, the contract is set and cannot be changed without incurring a surrender charge. The amount of the surrender charge and length of time the surrender charges are applied will vary from contract to contract. How you structure your annuities, at the point of purchase, will be an important factor in providing you with the most control and flexibility of the money which has been allocated to the contract(s).
Keep in mind when planning your retirement you are planning for continued income as well as various intermittent cash demands. Most importantly, your retirement money will need to last for 10 to 40 years, depending on your longevity. No matter how careful you are in your planning process, life being what it is, will undoubtedly bring some surprise experiences your way that you may not have considered in your initial planning efforts.
To help you gain more control and flexibility of use from your annuity contracts, which may be needed to support your potentially variable income needs during retirement, here are three purchasing tips:
Rather than purchase one large annuity, purchase several smaller annuity contracts. Here is an example: if you have calculated that you need to allocate $300,000 of your retirement portfolio money to an annuity, which will provide life income to come due at a later date, you may be best served to purchase three $100,000 annuity contracts rather than one single annuity contract for $300,000. The rationale behind this suggestion is as follows; should your circumstances change during your retirement years, you will have the flexibility to draw on one or more of the annuities without disrupting the entire allocation. You could find that a series of smaller contracts is easier to manage than one large contract.
Once you calculate the amount of supplemental life income that may be needed during your retirement, determine when you want that income to start. For example, if you are retiring at age 68, you may decide that you want some additional life income to start at age 75. Further, you may find that you would be best served to have more income available to you at age 80 or beyond. By purchasing smaller contracts and using one or more annuity products with one or more insurance carriers you will have more control and flexibility of the money. If planned properly the money housed in your annuity contracts can be adaptable to how and when the additional income or occasional lump sum withdrawals are paid to you.
Life income benefit riders can be costly. This is, for many entering retirement, not an issue if the planned for income annuity is definitely going to be used to provide a guaranteed life income for one person or both spouses to start on a specific date. However, on thorough examination of your speculated future income needs, you may find that having a life income benefit rider applied to one contract(s) is more appropriate. Then request the other contract(s) be issued with or without riders depending on what makes more sense for your specific planning. In the above example, applying for three $100,000 annuity contracts will provide the most flexible use of your funds if you do not require 100% of the life income applied for to come to you all at once.