Safety-First Retirement Planning

The following is excerpted from the final chapter of Wade Pfau’s new book, Safety-First Retirement Planning: An Integrated Approach for a Worry-Free Retirement. It is available at Amazon. All of the issues and questions discussed are explained with much more detail throughout the book.

It is important to understand the complex way insurance products work for retirement income. Here is a list of important questions to answer for the three major types of annuity products.

First, Exhibit 9.4 covers income annuities (also called single-premium immediate annuities or SPIAs). This list is relatively short. Exhibit 9.5 then covers questions for variable annuities, and Exhibit 9.6 is for fixed-index annuities (also called equity-index annuities). Some questions overlap, but others are quite different or are not relevant for all types of annuities. These lists are provided without further comment.

Exhibit 9.4

Questions to ask about an income annuity

Income guaranteed amount

What is the minimum guaranteed amount of lifetime income?

Guaranteed withdrawal rates

What is the guaranteed payout rate? How does it vary by age and length of deferral period?

Other withdrawal features

Does the contract provide liquidity to take nonguaranteed withdrawals? (Answering yes is uncommon)

Death benefit

What are the death benefit provisions, such as cash refund, installment refund, or period certain payments?

Insurance company credit rating

What credit ratings has the insurance company earned from the major credit rating agencies?

For deferred-income annuities (DIAs), make sure you understand how the annuity works with respect to its various features. This will help to assess the potential upside and liquidity to be compared with an income annuity. Exhibit 9.5 provides questions for variable annuities.