The case for Rotating Annuities

“Providing flexibility around retirement”

Annuities have received a bad press recently. But from the perspective of the recipient (or investor) they are a perfect way of matching assets and liabilities – pick the right type of annuity and you receive a predictable┬ástream of income until you die, regardless of when this occurs.

Furthermore, for people who are tempted to dip into and spend their savings, rotating annuities (one might compare them to a dividend reinvestment plan) can be a technique to control this habit and preserve wealth.

To my knowledge, no company actually offers a rotating annuity as a product. But is is possible to create one synthetically. Here’s how:

Invest your current savings in an annuity that vests immediately (or vests as soon as you reached the minimum allowable age – for example, in the UK most providers support a minimum age of 50 due to the way that tax legislation applies to pensions). This protects your lump sum from yourself, and gives you a monthly income until you die (the exact amount will depend upon the type of annuity chosen – see An Overview of Annuities for more details on this).

Whilst you are still working, and you can avoid the temptation to spend this monthly income, reinvest it in the annuity to increase the monthly payout. For younger people (relatively speaking – we are considering annuities here – so let’s consider somebody aged fifty as young) every 200 dollars returned to the annuity company will increase the monthly payment by about one dollar (assuming a 6% return, although this may be a bit ambitious at the moment for a healthy 50-year-old). So return 200 dollars per month for a year and your monthly return goes up by 12 dollars, return 200 dollars per month for about twelve and a half years and your monthly return goes up by 200 dollars. In other words, pay your annuity income back to the provider for twelve and a half years, and your income will double for the rest of your life.

Given that many annuity providers will begin to payout at age 50, if you have a nice lump sum saved by this age, and you can wait until you are 62 to retire, just adopt the approach described and your pension will be doubled.

Now, of course, there are tax implications that will reduce the income in some jurisdictions, and many institutions will propose punitive cost structures.

But if you can work around these, you are free to retire at any time.

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