As we talk about transitioning the business to new management, we must create income for the outgoing owners. The retirement income plan needs to provide adequate income for rising needs over time and still last until the spouse of the outgoing owner is dead.
A retirement income tool that is enjoying renewed enthusiasm is the immediate annuity. In its simplest form it allows the buyer to deliver money to an insurance company in exchange for a promise to provide monthly checks for as long as the buyer lives. Immediate annuities are a clear, straightforward contract between the buyer and the issuing insurance company. The reason for its renewed popularity is that so many of us are living so long.
The basics of an immediate annuity:
The Insurance Company Wins . . . if they buyer dies the next day, because the income stops and the insurance company keeps all the money.
The Annuity Buyer Wins . . . if she lives to be 120 years old, since the insurance company has agreed to keep sending monthly checks as long as she lives. (Period.)
A Better Way to Use Immediate Annuities
To provide income for a couple and to guard against premature death, a good solution is a period certain joint life annuity. This provides two benefits:
- The income is paid until the death of the second
- In the event of premature death, the income will be paid to the buyer’s estate for a set period of time.
For example, $100,000 in principle will buy:
- $566 per month for one life (6.79% payout); or
- $448 per month until the death of the second spouse (Joint Life) (5.38% payout); or
- $444 per month until the death of the second spouse or at least 20 years (Joint Life with 20 Years Certain) (5.33% payout). This means a guarantee of at least $106,560 in total annuity payments even if the owners die prematurely.
These rates are estimates from https://www.immediateannuities.com/information/annuity-rates-step-1.html. They are not guaranteed.
The problem here is that there is no protection from inflation. The U.S. rate for the since 1926 years has been 3.0 percent per year, according to the 2015 Morningstar® Andex® Chart. At that rate the cost of goods doubles every 24 years. So for a 60 year old couple who can expect to be in retirement for 30 years, every expense will increase by 2.4 times by the time they reach age 90.
So immediate annuities manage the risk that you will live too long and run out of money. They do NOT address the issue of increasing your income to keep pace with the cost of living.
We will cover that in another blog post coming soon.
If this blog has got you thinking about your own situation, get in touch with my office (firstname.lastname@example.org). I am always happy to visit with folks working on their transition process. I’m passionate about every farm in America having a successful farm business transition plan. If I can be of service, I’m eager to do it. Do Not hesitate to reach out.
While designed to provide accurate information on the subjects covered, they are not intended to provide specific legal, tax, or other professional advice. For a comprehensive review or specific personal assistance, always consult with an appropriate professional. Dunncreek Advisors does not provide legal or tax advice.