Using an Annuity to Pay Your Mortgage in Retirement
An annuity is a solid option for anyone worried about running out of money for their mortgage during retirement.
There's a certain peace of mind that is lost knowing that you have a mortgage hanging over your through retirement. This is especially true when you don't know if you will need to anticipate surprise costs in the form of cost of living or medical expenses.
Though there are many strategies for dealing with a mortgage during retirement, including paying some of it down and refinancing the loan, one strategy that works for some people is to purchase an annuity that provides regular payments that can be used for mortgage payments.
Basically, an annuity is an investment issued by an insurance company where you put in a set amount of money either in a lump sum or in regular payments. The issuing company will then invest the money to try to grow it and make it profitable. At a certain agreed upon point, the company starts making regular payments to you.
You can get the payments as a lump sum or as regular payments at regular intervals over a set period of time. Once the time period is over, the investment money is gone, but hopefully you have lived long enough to make it back. Depending on the annuity that you invest in, there are ways to leave the benefits to spouses and relatives.
While an annuity ends up being a more conservative investment than others, it pays off in the sense that it is provides regular payments that are not affected by fluctuations in the stock market. As with mortgages, there are fixed rate, variable rate, and hybrid annuities. One advantage of an annuity is that it allows you to put the money away and have it grow tax-deferred. When you take the money out as payments, you are only taxed on the earnings and not the amount that you contributed. The drawbacks of annuities are the fees and the complexity. Also, there are huge surrender charges if you decide to take your money out early.
Like any financial product, a short explanation of annuities does not fully explain a somewhat complicated concept. Get a decent understanding of it, though, and you will be able to have a meaningful discussion with your financial advisor to determine if it is right for you.
When it comes to mortgages, one strategy that people take is to roll over a sum of money from their retirement account and put it into a fixed annuity. They set it up so that the annuity pays out over the remaining duration of the mortgage. Part of the advantage of rolling it over like this without cashing out first is that you will avoid triggering a big tax bill.
Whether or not purchasing an annuity is a viable option is up to you. However, it is a guarantee that you will not run out of money and will therefore make your mortgage payments for the life of your mortgage. Also, you can make the terms of the policy longer to cover your taxes and insurance (that have been rolled into your mortgage all along) after the mortgage has been paid up. If you have other retirement streams set up already to take care of living expenses this will truly buy you some peace of mind!