2 Ways To Guarantee Yourself a Lifetime Stream of Income

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Money expert Clark Howard hates most annuities. He’s even called “annuity” a “curse word” on his podcast.

However, there are often exceptions to rules. And that’s the case here. Clark embraces immediate payout annuities and longevity annuities as legitimate options for some people.

Here’s a quick rundown on Clark’s two annuity exceptions.

Immediate Payout Annuities

With an immediate payout, you’re creating your own pension plan.

Not long ago, many retirees could count on a company pension and Social Security benefits on top of whatever they managed to save. Pensions are now becoming a rarity.

Immediate payout annuities involve your giving an insurance company a one-time lump sum — typically a minimum of $100,000. Then you start receiving payouts monthly, quarterly or yearly. Those start within one year and usually within one month.

You can earn a greater return elsewhere. An immediate payout annuity doesn’t have time to accrue gains since it starts paying out right away. You may be able to expect an annual return of between 1.0% and 1.5%.

Especially if you have a nice pile of money in a 401(k) or IRA, an immediate payout annuity can take away the anxiety of potential market volatility by guaranteeing you a certain income stream alongside your Social Security benefits.

You can choose a specific time period for the immediate payout annuity to last — or it will last until your death. With the former, your monthly payouts are a little lower, but your beneficiary can get a payout if you die.

With a life-only immediate payout annuity, one that lasts until you die, your payouts are a little higher. But if you pay, say, a $300,000 lump sum, only to die three months later, you and your family are out of luck.

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“The beauty of the immediate payout annuity is it’s like setting up your own pension,” Clark says. “For whatever money you put into it, you’re going to have your own made-to-order pension that gives you a check every month for as long as you live.”

Longevity Annuities

Despite a dip in the life expectancy of Americans in the last couple of years, influenced by COVID-19, the longer-term trend is for us to live to increasingly older ages.

As of 2019, 65-year-old women in the United States could expect to live, on average, until 86. The number of people living to be 100 years old is climbing as well.

What does that mean for our finances? It’s easier to make your money last until 85 than to 105. The older you are, the more inflation probably cuts into your purchasing power (and the more expensive your medical bills probably get).

Longevity insurance, or a longevity annuity, helps protect against demoralizing financial problems related to living an extraordinarily long life.

You generally buy one of these policies early in retirement. You’ll pay premiums for years. But you typically won’t start getting paid until you’re 85 years old. If you live that long, however, you can expect sizeable checks for the rest of your life — even if you do live to be 100.

The upshot is that you can also plan to spend most or all of your nest egg by your 85th birthday, knowing you’ll replace that income with your longevity payouts. This could help you spend money more freely that you otherwise may keep in reserve “just in case” you live especially long.

“The insurance company actuaries know that most people are going to die before they hit that 85. So the people who live to 85 or longer are going to get a huge check every month, relatively speaking, from the longevity annuity.

“So whatever money you have before you’re 85, you can spend every last penny of it. Because you know your birthday gift when you turn 85 is you’re living on the insurance company’s money for all the years that remain,” Clark says.

“People are living a lot longer than historical, and as they get older, they have ailments. So they can’t really substitute work when they run short of money. So it gives you the ability to know you’re not going to be living in extreme poverty in retirement.

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“The downside is if you wanted your kids to inherit anything, they just are flat out of luck. They inherit your memories, their memories of you — but no money.”

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