What is a retirement income?

Retirement income is the monthly check(s) you receive once retired. The traditional sources of retirement income are Social Security and pensions, both of which are guaranteed to last for life. Financial professionals often talk about Personal pension, which is Annuity.  It provides supplemental guaranteed retirement income. In addition, you can generate retirement income (that isn’t guaranteed) by withdrawing from the assets you accumulated over time: think 401(k), brokerage and savings accounts.

What are the different types of annuities?

What makes an annuity an annuity is its ability to provide guaranteed, lifelong income in retirement. It is called an income annuity. There are three types of income annuities:

  1. Immediate annuity (provides guaranteed, lifelong income starting 1-12 months after purchase)
  2. Longevity annuity (provides guaranteed, lifelong income starting 2-40 years after purchase)
  3. Qualified Longevity Annuity Contract or QLAC (a longevity annuity purchased with IRA funds starting after age 70½)

The other annuity, which has the option but not required to provide income is known as a deferred annuity. There are three types of deferred annuities:

  1. Fixed annuity or multi-year guaranteed annuity (similar to a CD, it provides a guaranteed rate of return for a fixed number of years)
  2. Fixed indexed annuity (that tracks market indices without the risk  of losing your principal and based on compound interest)
  3. Variable annuity (investment product using mutual funds with limits on how much you can gain/lose). We believe, it is not the best tool for retirement income due to market risks.

What is an immediate annuity?

An immediate annuity, also known as a single premium immediate (SPIA) annuity, is the simplest annuity product on the market. It’s purchased by people retiring within the next year or already in retirement. For a given amount of money paid upfront today, you receive a set amount of monthly income starting within one year that lasts as long as you live.

What is a longevity annuity?

A longevity annuity, also known as deferred income (DIA) annuity, provides lifetime income starting 2-40 years from now. Money is paid up front, but the income payments you receive are delayed for a period of 2-40 years. Because of the deferral, you will receive higher monthly income as compared to an immediate annuity. You’re also able to add additional payments to the contract over time (known as the Personal Pension). Longevity annuities can be good for people who want income starting years in the future.

What is a Qualified Longevity Annuity Contract?

A Qualified Longevity Annuity Contract, is a special type of longevity (QLAC) annuity. The QLAC is a way to purchase a longevity annuity using your qualified retirement savings (such as from an IRA or 401(k) rollover) but delays the start of that income to after age 70½. It’s given this special designation because it overrides the IRS required minimum distribution (RMD) rules.

What is a fixed annuity?

A fixed annuity, also known as a multi-year guaranteed annuity (MYGA), provides a guaranteed rate of return for a predetermined period of time. It is most similar to a Certificate of Deposit (CD) that is offered by a bank or other-FDIC insured institution, except that it is offered by an insurance company. When compared to CDs, fixed annuities offer higher guaranteed crediting rates over longer time periods (3-10 years), tax-deferred growth, the ability to annuitize upon maturity, and liquidity via penalty-free partial withdrawals for those 59½ or over.

Why do I need lifelong retirement income?

The average American is living longer, which means that your savings have to last longer too. At the same time, the decline of pensions has made it harder to be financially prepared for retirement. Preparing for retirement with just savings exposes you to market volatility and risks, i.e. your investments might lose value and/or you might live longer than you expect. Guaranteed retirement income — like pensions and annuities — mitigates both of these risks.

Is any difference between Personal Pension and income annuity?

Both the Personal Pension and a traditional income annuity guarantee lifetime retirement income, but there are some key differences between the two.

  1. The Personal Pension, which is an annuity too, is a subscription-based and accepts small, recurring contributions instead of a large one-time deposit
  2. The average Personal Pension account is opened with $5,000, as compared to a traditional annuity’s average one-time premium of $100,000
  3. Because you can contribute over time with the Personal Pension, you also have the ability to benefit from future increases in annuity rates

How does the Personal Pension last a lifetime?

Similar to a traditional income annuity, the Personal Pension is a contract between you and an insurance company where the money they promise to pay you is not only guaranteed but is given to you for the rest of your life. Unlike any market investment, annuities provide longevity protection so you don’t outlive your savings.

How much does the Personal Pension cost?

The Personal Pension requires a $5,000 starting contribution. That $5,000 turns into a future guaranteed retirement paycheck at a rate based on your gender, age, and when you want your pension to start. You can continue to contribute voluntarily, with as little as $100 a month. You can change your contribution size and schedule whenever you want.

Should I have a Personal Pension in addition to or instead of my 401(k)/IRA?

Your 401(k) and Personal Pension may play complementary roles. Your Personal Pension will cover all of your expenses once you’re retired such as housing, food, transportation, internet and phone. These expenses are life’s basics. In a small number of instances, the money you’ll receive from Social Security is enough to cover these fixed expenses, but in most cases, it’s not. 

How is the Personal Pension different from a 401(k) or IRA?

401(k) and IRA accounts are ways to invest in the market and accumulate wealth for retirement. The amount you’ll have at retirement depends on what you put in and how the market performs (i.e. its cumulative gains and losses). At retirement, you’ll start spending the money you saved, hopefully with the right budgeting so you don’t run out.

A Personal Pension, on the other hand,  generates an infinite amount of guaranteed monthly income that lasts as long as you do. Instead of being invested in the market, the Personal Pension is a portfolio of income annuities guaranteed by life insurance companies. It’s a way to prepare for retirement without worrying about the market risk or how long you’ll live.

Is Personal Pension is a good fit for me?

The Personal Pension may be right for you if:

  1. You are more than 8 years from retirement,
  2. You want a guarantee for your retirement savings,
  3. You don’t currently have a traditional employer pension – or if you do have one, it’s not large enough, and
  4. You plan on living a long life.

What is the enrollment process?

When you make a decision to apply for the Personal pension, we send you the application. You fill in and return paperwork. The information collected is only provided to the insurance companies backing your Personal Pension and is 100% confidential. We never collect your money. You will pay directly to the Insurance company, who will provide your monthly income when you retire. 

You will need the following information available to complete your application:

  1. Personal information, including your address, phone number, SSN, place of birth;
  2. Financial information, including your income, expenses, assets, debt, and any existing life insurance or annuities you own;
  3. Driver’s license; and
  4. Bank account or IRA information.

How my Personal Pension is funded?

During the enrollment process, you will choose the source of funds for your Personal Pension. Your options include savings, checking, or brokerage accounts, as well as your Traditional IRA, Roth IRA, or Rollover 401(k) accounts. Using post-tax money will create a standard non-qualified Personal Pension. Using pre-tax money will create a qualified Personal Pension. 

How do I pay the insurance company?

The insurance company application we provide includes a “request for transfer” form. This form is then sent from the insurance company to the financial institution holding your money, which initiates a transfer from your account to the insurance company. This process takes 2-4 weeks. 

How much money do I need to contribute after my first contribution?

After your starting contribution, you can contribute as little as $100/month or more on a flexible schedule that suits your needs.   

Can I withdraw money from my Personal Pension?

You won’t be able to make withdrawals from your Personal Pension like you would with a savings account. In that way, it’s more like a pension. 

Can I include my spouse in my Personal Pension?

Yes! When you customize your Personal Pension, you can choose to for it to cover both you and your spouse. That means that you’ll receive income payments as long as either of you is alive. You also have the option to reduce the income generated upon the passing of the first spouse, which will allow for more income while both spouses are alive.

How do taxes work for the Personal Pension?

There are three kinds of Personal Pensions: a Traditional IRA Personal Pension, a Roth IRA Personal Pension, and a standard (non-qualified) Personal Pension. The taxes you pay once you start receiving your monthly paycheck depend on where the money comes from.

Should I purchase my Personal Pension with pre-tax or post-tax money?

If you have an existing IRA or 401(k) Rollover that you would like to transfer to something guaranteed, then it makes sense to fund it with that pre-tax money. 

What is the return on a Personal Pension?

Your Personal Pension is not a typical investment. It’s a member of the fixed income family, like bonds, but does not have a maturity date. Instead, your Personal Pension will generate income for as long as you’re alive. Living until your life expectancy will generally produce a return comparable to a long-term A-rated bond. The longer you live, the higher your effective return will be, and vice versa.

How Personal Pension depends on the interest rate?

When you contribute to your Personal Pension you are giving the insurance companies small increments of money that they invest on your behalf. Because the insurance companies are using your money to invest, the interest rate at the time of this transaction determines the insurance company’s cost of borrowing. The higher the interest rate at the time, the higher the return you receive for giving the insurance company money.

Should I purchase the Personal Pension after interest rates are going up?

With the Personal Pension, you start small and make contributions over time. For every contribution you make, your Personal Pension purchases you a small income annuity at the best rates available. This way, you can benefit from higher rates starting at a younger age and still have the ability to capture rate increases with future contributions. In the end, your Personal Pension provides you with a diversified portfolio of income annuities that will generate guaranteed, lifelong income.