Why Income Annuity is Getting Favorite?

Income gap, just for illustration (credit to Vanguard)

For my international friends, in case you did not know, Income annuity is an investment to provide monthly income which last for life time.

This is a kind of guaranteed income to avoid outliving of our income. We may get income payment as policy signed. People usually get regular income in the future, especially after retirement ages.

There are two choice: fix or variable regular income. Variable may fluctuate which depend on market interest.

Then, Why Income Annuity is Getting Favorite? Here the reasons:

- filling the gap of income after retirement

- may last for life or until age of 85 (depend on policy we chose)

- no annual contribution limit, while retirement accounts of 401(k) and IRAs have limitation.

Calculation of annuity payments

For better understanding, let’s say we buy US$ 100,000 annuity policy. How much regular monthly payment if we start to receive annuity income at age 60 years old?

We do simple calculation based on available formula or using calculator. Calculation is depending on some factors:

- the annuity market rate (offered by insurance agencies) ranges from 3.7% to 8.1%. We choose 6% for example only

- We estimated our lifespan reach 85. Thus number of period: 85 years old – 60 years old = 25.

Hence, the regular monthly payment is US$ 651.9 (US$ 7822.67 annually). We receive this payment for 25 years.

If we wish to get monthly payment of US$ 1500, thus, we need to invest around US$ 240,000.

How about if we die before receiving 25 year payment? Our spouse or kids will get the balance.