Living on Social Security Benefits

Annuity Definition and 5 Ways to Pay for Retirement

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How to use an Income Annuity to Guarantee Retirement Income

What is an income annuity and how can it help you close that income gap in retirement?

In this video, I’ll show you how an annuity can guarantee income for you or a loved one in retirement. Then I’ll reveal five more ways to close that income gap and pay for retirement.

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Nation, we looked at the retirement crisis last week and just how bad it is to rely completely on social security and if you haven’t seen it, check out that video because it’s government cheese and all kinds of bad.

Living on Social Security Benefits

This week, we’re talking about the solution! I’ll walk you through what are annuities, how to use them for guaranteed income, and then give you five ways to help pay for retirement.

I’ll show you why annuities can be an opportunity to fill that gap in retirement and it’s critical that you plan on these before retiring, but I also want to give you some ideas you can use if you’ve already retired.

Now we’re not talking pensions or social security here. If you’ve got a pension coming, that’s great but most people don’t and it’s not the kind of thing you can just flip a switch on. Instead, I want to talk about five income sources you can set up right now to help pay for retirement.

I want to thank AgeUp for sponsoring the video. Ageup is an income annuity backed by Mass Mutual that provides supplemental income for yourself or your parents at a certain age. You contribute as little as $25 a month and get guaranteed income after you or your loved one reaches 91 years old and can even get your contributions back on an optional death benefit.

See how easy it is to guarantee income in retirement, check out the Ageup calculator here!

What is an Annuity?

So let’s look first at an annuity, how it can produce that guaranteed income in retirement, before we get to those other five options.

An annuity is a guaranteed income investment, usually sold by an insurance company, that pays out a fixed payment. You can fund an annuity, so buying the investment, with a one-time payment or through regular payments.

Some annuities are immediate, so you buy into it with a one-time payment and immediately start getting that set income paid out each month. Other annuities are deferred, which just means payments are set to start sometime in the future.

How Does an Annuity Guarantee Income?

With the death of pensions and the uncertainty around social security, annuities have become much more popular to guarantee the livable income in retirement. And unlike the five ways to make money in retirement that we’ll talk about later, this is something you don’t have to do anything to receive.

Once you invest in that annuity, it’s completely passive and guaranteed income. The amount you collect won’t change each month and it’ll be in your bank account when you need it.

For this reason, annuities are not only popular for protecting your own financial future but a lot of people are now looking at annuities to protect the future of their parents. The Urban Institute at the U.S. Department of Health estimates that a parent with serious long-term care needs means upwards of $140,000 in out-of-pocket costs.

Pros and Cons of an Income Annuity

So the pros of annuities are that guaranteed income for life. Whether it pays out immediately or at a set date, annuities keep that income stream alive for as long as you live. It’s a fixed amount and you’ll know it when you buy into the annuity, so you don’t have that uncertainty planning for retirement. It’s also a guaranteed return on your money. You buy into that annuity contract and you’re getting a guarantee, not relying on stock market returns to fully fund your retirement.

There are some cons to annuities too though. The return on your money, while guaranteed is fairly low compared to other investments. The insurance company has to guarantee that income so it’s going to set a rate it knows it can get and then invest your annuity investment in ultra-safe assets.

Annuity income is taxed just like regular income, so those in higher tax brackets may pay more than say capital gains income from investments or money from a Roth IRA. Finally, the annuity promise is only as good as the insurance company. While policy holders can file a claim with State Guaranty Funds if the insurer goes bankrupt, you really want to go with the most reliable insurers when you’re considering an annuity.

How to Buy an Income Annuity

So when AgeUp called me about its income annuity, the first thing I did was look into the insurer, MassMutual. I’ve actually worked with the company before through its Haven Life agency so I knew MassMutual has over 160 years in the business and an A++ rating for financial stability by A.M. Best.

AgeUp is a twist on the annuity idea in that you can buy an annuity on yourself or for your parents. You can protect your future with that guaranteed income or secure an income stream in case you need to pay caregiver costs for your parents when they get older.

Another way AgeUp is different is that payouts start when you or your parent reaches 91 years or older, that’s older than most annuities but it also means the cost to get that fixed income is much lower. The minimum upfront cost for a traditional annuity is ten-grand with the average contribution at $181,000. AgeUp is designed to be affordable to everyone with a monthly investment as low as $25.

Now I know, the first question that comes up here. What if my parent or I don’t live to 91 years old? What happens to my annuity?

I feel you. My mom died at 64 and my dad at 42…I can only hope to live to 91. But according to the Social Security Administration, one-in-three 65-year-olds will live past the age of 90, and with those costs of healthcare rising, this isn’t something you can leave to chance.

AgeUp also has a program where you can get 100% of your contributions paid back to you if the annuitant, that’s you or your parent, doesn’t live to that age where payments begin.

I’ll be doing a step-by-step to how AgeUp works next week but it takes less than a minute to get an estimate. I’ll leave a link to the estimator below and you can get a quote on an annuity for your parents, your spouse’s parents, grandparents and even aunts and uncles. You put in their age here and how much you want to contribute each month. Then at what point you want to start receiving payments, anytime between that person’s 91st and 100th birthday.

I’ll choose no here for the money-back payout option and enter my email address then click enter and this tells me that for just $50 a month, I can lock in that income of $462 a month when my mother-in-law reaches 91 and guarantee that stream for the rest of her life.

I can also estimate an income annuity for myself, to guarantee an income as I get older. So we’re back in the estimator and I need to fudge the birthday here because you need to be 50 or older to qualify so I’ll see what it would say if I were 53 years old. I’ll contribute $25 a month and lock-in that income at 91 and again I’ll choose no on the death-benefit.

So this says I can lock in an income of $818 a month if I start contributing to the annuity when I’m 53 years old.

Use the tool to find how much income you can lock-in with AgeUp

How Much Does an Annuity Pay?

Now if you do the math here, that’s pretty good. From 53 to 91, that’s 38 years and a total of $11,400 in contributions at that $25 a month. On that $818 monthly income stream, that’s over ninety-eight hundred dollars a year and it’s guaranteed for as long as I live.

Even if I had selected the optional money-back benefit, so the option to get all my contributions back if I don’t live to 91 years old, I’d still be able to guarantee a monthly income of $521 or $6,252 a year.

So I pay into this annuity, that $11,400 in contributions. If I don’t live to 91, everything I paid in is returned. If I live to 91, I collect over $6,250 a year for as long as I live.

I’ve got that stress-free certainty around the guaranteed income. I know that if I need long-term care, I won’t be a burden on my kids and can count on that money.

Alternative Ways to Pay for Retirement

So an annuity can go a long way to close that gap and I think it’s something everyone should consider, either to help pay for a parent’s expenses or your own. But I also wanted to share some other ways to close that income gap, whether you’re in retirement now or just planning for it.

And our first method is the undeniable theme of the 21st century, the sharing economy and apps to make money.

Now I’m not talking about driving for Uber, which basically just turns you into a taxi driver, but there are lots of ways to make money with the sharing economy that mean almost no work on your part.

You can rent a spare room on Airbnb or rent your car on apps like Zipcar and Turo. You can rent out a parking space you own on Spot and even clothes or just about anything with apps like Rentah and Poshmark.

So you’re not going to pay all your bills with these apps but you can make some solid money to help fill the gap. Half of all Airbnb hosts make $500 a month or more and Turo users report making an average $720 a month renting their car out.

That’s not bad considering some of these are as close to passive income as you can get.

Another option to help pay the bills in retirement, as an online freelancer or through a side-hustle.

Honestly nation, I don’t even think about retirement the same way most people do. My business is entirely online and I enjoy what I do so I can’t imagine every not doing this at least for a few hours every week.

So a J-O-B doesn’t have to be something you go to every day, slog through the hours and wish for the cold embrace of death. As a freelancer online, you can find something you enjoy doing, do it five or ten hours a week and easily make an extra grand a month.

You can freelance anything, basically just doing that work virtually and getting paid by the hour or per project. You can use sites like Upwork and Freelancer to get an idea of jobs and find projects.

Other ideas include providing services through your own website, selling on Amazon or eBay…and yes, even starting a YouTube channel!

Another idea here, one that lots of retirees use, is equity on their home.

But before you rush to the phone the next time Alex Trebek tries to sell you a reverse mortgage, there are actually a lot of ways to get money out of your home.

The traditional way would be that cash-out refinance or a home-equity line of credit but you might also consider selling your home to your children. You get the cash and can negotiate no rent for as long as you live. It’s cheaper than bank refinancing or a reverse mortgage and can actually be a great way to pass your home to your kids without having it go through an estate.

One of my favorite ways to produce an income here, through income investing.

This isn’t just dividend stocks though and in fact, there are a lot of income investments that pay more than those traditional dividends.

A few income ideas include real estate investment trusts, REITs, which are companies that own real estate and pass the profits from rent on to investors. There’s master limited partnerships, MLPs, which own oil and gas pipelines. Business development corporations, or BDCs, make loans to small- and mid-size businesses and pass the interest on to investors and then good old bonds or fixed income investing is one of the safest income investments you can make.

Average dividend yields for these range from three percent up to 10% a year and can really help produce that regular income.

Now I said I wasn’t going to talk about social security but there is a trick that can boost your monthly income that I had to talk about.

While social security isn’t a new income source, there is a way to get a little more out of it. And if you’re on the edge of being able to afford your golden years, waiting just a couple of years can make a huge difference!

For most of us, those born after 1959, the age when you can collect your full social security benefit is 67 years old. But for each year you wait to start collecting, you get an 8% increase in the monthly amount.

You can wait up to three years, to the age of 70 to start collecting social security, and get that 24% boost in your payments. That means if you were looking at that average SSI benefit of $1,500 a month, waiting until 70 means being able to count on $1,860 a month instead.

And this doesn’t mean you have to wait to retire. If you can rely on your investments for a few years, delaying social security, then that extra amount each month might be enough to pay the bills.

How Much Income Can You Guarantee in Retirement? Click to Find Out on AgeUp Now!

Paying the bills can be a nightmare for many retirees so the answer to all this might be a combination of these ideas. Lock in that guaranteed income with an annuity and fill in the gaps with extra cash from these other sources. I’ll leave a link to AgeUp in the video description below for more information on a deferred annuity for yourself or a loved one.

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