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Choosing The Right Retirement Annuity
For most people, the milestone de-cisions in life are often: what will be my career, whom do I marry (or not), buying a first house and, if I retire with a pension, which annuity option do I take. The last one, like the others, re-quires a lot of study. Generally, at retirement, you get the choice of taking a life only, or a joint and survivor annuity - J&S (you may also be offered a lump-sum option but that’s another story). Although a life only annuity pays the most money, payments stop at your death. A J&S an-nuity pays you less while you are alive, but will pay your spouse (or whomever) something if you die. Thanks to legislation sponsored by Geraldine Ferraro when she was a Con-gressperson, if you are married and se-lect a life only annuity, you must produce a signed, notarized permission slip from your spouse. If you select a survivor annuity, the amount that your spouse receives depends on the election you choose. A joint and 50% annuity will provide you with a monthly payment and, when you die, half of that payment to your spouse for lifetime. A joint and 100% pays you and your surviving spouse the same amount. An example should clarify things. Let’s say that you are offered a life only annuity with a monthly payment of $1,667 per month. Because it is a life only annuity, when you die, your spouse receives nothing. A second option-Joint and 50% would provide you with $1,500 per month and pay your spouse $750 per month if you die. The third option-joint and 100% gives you $1,175 per month and provides the same amount to your spouse after your death. Anybody who can add a column of numbers would opt for the life only annuity, but if there’s someone they must provide for, they feel forced into a J&S option. If they take the J&S op-tion they have, in effect, bought an in-surance policy from their pension plan, and an unappetizing one at that. This policy guarantees your spouse a lifetime income after your death. How-ever, if your spouse dies before you, the survivor benefit will vanish, but the lower monthly benefit continues as long as you live. Additionally, you can never change the beneficiary. When you take a J&S annuity op-tion you are making a bet that you might lose. You are betting that your spouse will outlive you. But what if you are wrong? In the above example, had you opted for the joint and 100% annuity, you will receive $492 less per month than you would have had you taken the life only annuity ($1,667-1,175). That comes to $5,904 per year. What if your spouse dies one year after you retire and you live another 20 years? You lost a bet in the amount of $112,176. You should leave bets like this to life insurance companies. They have the law of large numbers on their side. By insuring large numbers of people, it doesn’t matter to them who dies first. But it does to you. If you are insurable, you may be better off taking the maximum available— $1,667 and pur-chasing a life insurance policy on your-self. If the spread between the life-only annuity and the J&S is sufficient to purchase a policy to provide the necessary income stream to your beneficiary, you can enjoy several benefits. The first is, if your spouse dies short-ly after you retire, you can cancel the policy and enjoy the higher payments for the rest of your life. If the policy has accumulated value, you can put it in your pocket. You could also keep the policy, change the beneficiary and provide for contingent beneficiaries, perhaps children, which is something you cannot do with a J&S option. Another option available is that you can pay for the policy with a lump sum when you retire and thus avoid paying annual premiums. Alternative-ly, with the variable and universal policies available today premiums can become "paid up" after 10 or 12 years. If your spouse does not die for a long time, the cash values in the policy that have been growing free of taxes can be used to supplement your retirement income. The above strategy works in some cases but not in all. First of all, you must pass an insurance physical. Second, the spread between the life only and the J&S must be sufficient to pay the premium. Also, the time to take action is not the day before your retire. That’s often too late. If you are a candidate for this strategy the time to start is now! The sooner you buy the life insurance, the better. Why? Today you can get the insurance. Tomorrow, if you develop a health problem, you can’t. Also, the younger you are, the lower the premiums and the longer yop have to accumulate cash values. So, as in any of life’s big decisions, study well and do it early.
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