Lifetime Annuity

As retirees are living longer and longer these days, a lifetime annuity begins to make more and more sense as a financial tool for guaranteeing a certain income over time.  You can shop around online and in person to check which companies are offering the annuities with the best deal.

When buying a traditional annuity, you are paying for a stream of fixed payments that will last a definite amount of time like 10 or 15 years.  After these 10 to 15 years expire, the annuity completely stops paying.  This can be a challenge because if you live longer than you expect, one day your comfortable fixed income will suddenly go to zero and you may be without a steady source of your own income.

A lifetime annuity is different because it does not have an expiration date and will instead pay out a fixed amount each month for however long you live.  This can be great because if you live longer than you expect, the lifetime annuity will continue to pay.  These are sometime also called perpetual annuities or even perpetuities.  These can be a bit more expensive because they are taking risk off of you and putting that risk on the bank or whoever is administering the annuity.  Typically it will be priced by making a guess at your statistical longevity based on your age, physical condition and a number of other factors.  Then, the company will continue to make these payments for as long as you are alive, independent of whether you living a shorter or even dramatically longer life than they expected.  This uncertainty of future payments makes for more risk that you will certainly pay for.  However, this higher degree of personal certainty may be worth if for you and your spouse.

There are a couple of things you will want to take into account when trying to get the best deal on lifetime annuities.  Let's assume that you have $200,000 to purchase an annuity.  First, you want to make sure that the upfront fees are as small as possible.  These fees don't help make sure you get a better monthly payment, and can vary widely. Typically these fees are almost entirely profit for the sales person who sells you the annuity, so you can see why they may have the incentive to offer you an annuity at first with very steep fees that you should not purchase right away without shopping around.  Once you have the minimum fees,  you will want to choose the annuity that provides you with the greatest possible monthly income for a certain cost.  This will vary because different companies will judge your life expectancy differently and accordingly believe that they can make differing levels of monthly payments for what you spend on the annuity.  Effectively, this means that you will probably be purchasing the lifetime annuity from whatever company estimates that you will die first since fewer payments means that they can give you more money per payment!  Remember to shop around and not take the first deal that comes along!