Wills and trusts are widely known to be basic components of the estate planning process. We have been discussing aspects of these arrangements week by week in this blog.
In our April 13 post, for example, we discussed advance care directives.
But regardless of your specific estate plan, most people who are planning for their elder years face an underlying question: how will you make your money last long enough to have a dignified retirement?
In this post, we will discuss the role that one particular financial instrument - an annuity - can play in this.
Etymologically, the word "annuity" is related to the Latin word for yearly. It refers to a fixed sum, to be paid at specified intervals. The duration of the payments could be for life or for a certain number of years.
The actual payments, however, are usually structured to come monthly.
Of course, a basic definition is one thing and a specific financial product is another. Annuities offered by life insurance companies come in various shapes and sizes.
For example, an "immediate pay" annuity involves putting in a certain amount of money and receiving a given percentage of that sum at specified periods throughout the rest of your life. This type of annuity can also be taken out for a beneficiary other than yourself, such as a spouse.
There are also annuities that function in a way similar to old-style pensions,
providing payments spread out over time and structured in various ways.
These include:
• Immediate fixed annuity - fixed payment amount each month
• Immediate variable annuity - payments based on value of portfolio
• Inflation-linked annuity - payments adjusted each year for inflation
Financial planners often encourage people to buy annuities because annuities can be a tool for making sure that you don't outlive your assets. In that sense, they can play an important role in an estate plan.
To be sure, there is an element of chance involved. Someone may put a substantial amount into an annuity and die before the official life-expectancy for someone their age. When that happens, the benefits of an annuity don't really pan out.
But when someone lives long past the official life-expectancy age, an annuity can be a good vehicle for making sure they don't run out of money.
Source: AARP, "Is an Annuity Right for You?" Jane Bryant Quinn, Nov. 2013