| By :
Brian Fricke
Have you heard the reports about how the government is looking at giving 401(k) plans and their participants the option of moving some of your money into a guaranteed income annuity? If you're wondering whether this type of annuity makes sense for you …keep reading. I should be specific, as there are many kinds of annuities out there — deferred annuities, fixed annuities, equity index annuities and variable annuities. Those are all essentially accumulation or saving annuities, which means they are not the specific type of annuity the government is talking about in this case. What the government is talking about here is what is called an immediate annuity - here's how it works. You deposit (or give up) a lump sum of money, and in return, the annuity company guarantees you an income stream for a period of time, or even for life. Who wouldn't want income that you can't outlive? It sounds great, but there are some reasons for concern. This type of annuity can be a double-edged sword - and what edge of the sword you get depends on how long you wind up living. For example, if you give up a large, lump sum of money in favor of an immediate annuity payment — and then you're killed in an accident a month or two later. Guess what happens then? There will be nothing left to transfer over to your heirs — unless you select a slightly different variation of the income annuity option. The fact that unexpected things tend to happen in life is one reason a lot of folks shy away from so-called income annuities. The concern is that if they meet with any unexpected premature demise, their family is not going to get back even what they originally paid to purchase the annuity income stream in the first place. To counteract that, there are some income annuities that allow you to purchase a guaranteed income stream "plus lifetime," which usually means for life with 10 years certain. What that means in English is that the income payments will continue for the remainder of your life or for 10 years, whichever is longer. So if you meet with an untimely demise before your 10 years are up, and if you haven't collected 10 years of payments, your family members or your beneficiaries will. Of course, there is a drawback to that extra measure of protection. You can probably imagine what it might be, if you think about it. Your monthly annuity check is not going to be as large as the check would be on a life only annuity without any guaranteed time period of payments. That just make sense - the bigger risk means the bigger reward. So if you want the highest monthly income stream possible, the better option is going to be a life only annuity. On the other hand, if you want to make sure your payments keep coming in even if you pass away prematurely, then a life with a certain period of time guaranteed is a safer bet. In that case, 10 years is the most common option. Interest rates also determine how big your monthly annuity payment will be. For the same amount of money, you'll get a higher monthly payment during a period of higher interest rates. You'll end up with a much smaller monthly payment in times of low interest rates…like now. So even if you like the idea of guaranteed annuity payments, you'll probably be better off waiting to make this purchase when interest rates have gone up.
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