Using your savings to supply some part of your future income often means converting it to a life annuity. But, when should you consider beginning your life annuity?
A life annuity is a contract with an insurance company to pay you monthly payments for the rest of your life. Buying an immediate annuity will immediately convert your premium into a lifetime income stream. If you live long enough, you'll receive far more than the premium you paid including its earnings.
That's a unique product that only an insurance company can supply. It relies on both conservatively investing premiums from a great many clients and the reliability of mortality statistics for predicting when they'll die. Guaranteeing payments to its clients means that the internal return for its clients investments are significantly less than alternative, noninsurance investments.
If you're worried that you'll outlive your savings, you may want to convert it into an immediate annuity. Several factors influence just when that should be. These are:
* your age,
* your health, and
* inflation
Your age is important since the amount of your monthly payment is directly related to your remaining life expectancy - or better said - the remaining statistical life expectancy of other people of your age. How long you as an individual will live is really unknown unless you're terminally ill.
The longer you wait to begin, the higher your benefit payments will be for a given premium paid because you're expected to live for fewer years. But ironically, your remaining life expectancy doesn't decrease as fast as you may think.
Here's the IRS's remaining life expectancy according to your current age. Remember that life expectancies are defined as a 50% chance of dying before that remaining life expectancy is attained. Of course, that means you've also a 50% chance of living longer than that remaining life expectancy:
* At age 60 you have 25.2 years remaining which gets you to 85.2
* At age 65 you have 21 years remaining which gets you to 86
* At age 70 you have 17 years remaining which gets you to 87
* At age 75 you have 13.4 years remaining which gets you to 88.4
You can see that by living from age 65 to 70, your remaining life expectancy decreased by only 4 year and not 5. So the longer you live, the older becomes the age you're statistically (50% chance) expected to die.
If you're in good health, then you may well live longer. That can make buying an annuity a better investment for you.
But don't think the annuity companies haven't picked up all the nuances of these statistics. Besides, unlike a life insurance policy, your state of health is not critical when buy an annuity. Terminally-ill people don't by life annuities. It's the healthier people that do.
Another reason to hold off as late as possible is to undermine the loss of buying power that fixed annuity payments suffer under inflation. Starting later means less years to have your payments eroded by inflations. And while you're holding off, you can invest your savings to help maintain their buying power.