TIAA-CREF offers multiple income options heading into retirement. These decisions include various options from rolling over an accumulation to an IRA to taking a lifetime annuity. When looking at the latter, there are also multiple decisions to be made surrounding lifetime annuity options. After deciding to use a lifetime annuity with TIAA-CREF, an investor must decide between a single-life or joint-life, the asset allocation, and whether to add a guaranteed period. The option to take a guaranteed period is often misunderstood. In this article, we will take a look at the guaranteed period and how it works.
A lifetime annuity provides income for an individual (if choosing a single-life annuity) or a couple (if choosing a joint-life annuity) for as long as you live. I will not go into the pros and cons of an annuity in this article, but a lifetime annuity can be very attractive by providing peace of mind that you will not outlive your income. It may be appropriate for retirees that have a family history with a longer life expectancy or live a healthy lifestyle. However, one of the main disadvantages of an annuity happens if an annuitant passes away shortly after they annuitized their contract. Where does your payment or accumulation go? It goes to pay for the investors that live beyond their life expectancy. In a large pool of people, the actuaries are very good at predicting exactly how many annuitants will live beyond their life expectancy and how many will predecease their life expectancy. So what do you do? This is when a guaranteed period comes into play
I will start with what a guaranteed period does not mean – it does not mean the annuitant receives an income for a fixed period of time. An annuitant is entitled to an income as long as they live. However, it does guarantee that at least someone, a beneficiary, will receive an income for a period of time should the annuitant pass away prior to the end of the guaranteed period. Guaranteed periods can be added in 10-year, 15-year, or 20-year periods not to be greater than the annuitants life expectancy. Please note, a guaranteed period does decrease the amount of income received by an annuitant.
In the first example, John chooses a single life annuity with a 15-year guaranteed period. He receives income for the next 18 years. Upon his death, the payments stop and the guaranteed period was not used.
In the second example, Ann chooses a single life annuity with a 15-year guaranteed period. Ann receives income for 5 years and passes away in a car accident. In this case, a beneficiary, Ann’s daughter can choose to continue to receive the payments for the next 10 years or receive the present value of future payments in a lump sum.
Does a Guaranteed Period Make Sense?
In almost every case, a guaranteed period of some type does make sense. It safeguards against one of the greatest disadvantages of an annuity – a death quickly after a lifetime annuity is started. There is a “cost” to add a guaranteed period. However, the cost is typically affordable and does not hinder the selection of a guaranteed period. This is just one of many decisions to be made heading into retirement. Many income options are irrevocable so be careful to educate yourself and make sound decisions up to and through retirement.
This article is written by Kevin J. McNab. Kevin is a leading national advisor working with professors, doctors, and university executives across the country. Kevin is The Professor’s Advisor!