Annuity Dollar Cost Averaging
“My NFL pension can barely pay my son's tuition. You know, it's very little money.”
--O. J. Simpson
Many years ago, people worked for a company for their entire lifetimes, got a gold watch and a pension upon retirement, and were able to live on that pension for the rest of their lives. The retirement age was pretty close to the life expectancy, so not that many people enjoyed a long life with a pension. However, as life expectancies rose and employers changed, the use of pension benefits decreased. As of 2008, only approximately 20% of workers were covered by a defined benefit pension plan (http://www.ssa.gov/policy/docs/ssb/v69n3/v69n3p1.html). Resultantly, a minority of people can count on steady retirement payments outside of Social Security upon retirement; the rest have to use their own savings to make up the shortfall, if necessary, between Social Security and their expenses.
One possible solution to make up the shortfall and to reduce risk is to purchase an annuity. Annuities give some level of security that payments will continue no matter how long you live. Just as with nearly anything else, though, there are some risks to annuities. The annuity provider could go bankrupt, and if your annuity amount was greater than the amount covered by guaranty providers, then you will lose that money – usually this amount is $100,000, but varies by state (http://www.nolhga.com/).
Another risk is that interest rates could change. This has two repercussions. The first is that the amount of payments the same purchase price would buy could change: if interest rates rise, then payments will rise, and if interest rates drop, so, too, will payments. You could find yourself thinking “woulda, coulda, shoulda.” The second repercussion is that inflation will generally rise or drop with interest rates. Inflation tends to be low in low interest rate environments and high in high interest rate environments, though interest rates aren’t usually the cause of inflation. Higher inflation means that you lose purchasing power with the same amount of money. Many annuities offer inflation riders, for a cost, but the rider may not adjust your payments as much as inflation rises.
One approach is to dollar cost average annuity purchases over several years. Similar in concept to dollar cost averaging, where you buy stocks/mutual funds/bonds periodically to buy more when the market is low and to prevent you from attempting to time the market, the idea behind annuity dollar cost averaging is to buy streams of payments in increments rather than in one big lump sum. There are many reasons to consider dollar cost averaging into annuities:
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Jason Hull is a Fort Worth fee only, hourly financial planner who serves clients in Fort Worth, TX and Dallas, TX as well as serving clients nationwide.
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Hull Financial Planning is a Fort Worth, fee-only hourly financial advisor. The cities we serve in the Dallas-Fort Worth area include:
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