According to research conducted by the Center for Retirement Research at Boston College in 2007, retirees tend to be happier with a traditional defined-benefit pension that pays a guaranteed monthly check for life than with a comparable lump sum amount as found in a typical 401K, or other type of retirement accumulation plan, that would produce the same amount of monthly income.
But there’s a rub when it comes to finding retiree pension happiness, according to the Pension Benefit Guaranty Corporation traditional pension plans have dropped from an all time high of 112,000 plans nationwide in 1985 to about 30,000 plans in 2007. This trend is expected to continue due to the added expense and liability associated with the traditional Employer Pension plans.
So where can this “pension happiness” be found? For many retirees it’s in the form of an Immediate Fixed Annuity issued by a commercial insurance company.
Underlying many of the pension plans in America is an annuity contract purchased by their employer to fix the liability to pay future lifetime income to each retiree. What many individuals don’t know is a personal Immediate Fixed Annuity can also provide the same lifetime income benefits.
To be sure, there are just about as many different types of fixed annuities as there are grains of sand and all with various elections, so obtaining guidance in this area can be fraught with potential problems. When it comes to agents selling these types of policies, be sure to seek a trusted advisor who will disclose all the contractual policy provisions upfront, including their initial and ongoing commissions before purchasing a policy.
The Immediate Fixed Annuity is one in which a lump sum can be transferred today and then next month the Insurance Company starts sending a guaranteed monthly check for life. It may also be configured to provide income over two lives such as the owner and spouse, and depending on the current age and life expectancy of the beneficiaries the monthly payout may be very attractive, especially for those over age 59 ½.
Please remember that the guarantees of fixed annuity contracts are contingent on the claims-paying ability of the issuing insurance company, so look for companies that have either an AM Best’s A+ rating or Standard and Poors rating of AA or higher. The Immediate Annuity contract owner typically does not have a surrender value, unless a cash refund option is chosen, and therefore the owner has typically exchanged the lump sum for a guaranteed monthly check which stops upon the death of the last beneficiary. Make sure to ask the agent for a policy disclosure before purchasing and it’s a good idea to have several quotes from differing companies. Be sure to work with a knowledgeable advisor familiar with the IRS regulations as certain tax rules may apply prior to age 59 1/2.
While not suitable for everyone, fixed annuities may help many Americans find retiree happiness.
Annuities are designed for long-term retirement investing. Additionally, if purchased within a qualified plan, an annuity will provide no further tax deferral features. All withdrawals of tax-deferred earnings are subject to current income tax, and, if made prior to age 59 1/2, may also be subject to a 10% federal income tax penalty.
Richard L. Cox Sr., CFP®, QFP, ChFC, CLU, MFP, AEP is Chief Investment Manager of Cox Wealth Management, LLC. Securities offered through FSC Securities Corporation Member FINRA/SIPC. Investment advice offered through Cox Wealth Management, LLC a Registered Investment Adviser not affiliated with FSC Securities Corporation.