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Believe it or not, buying an annuity can be a good decision

If you do an Internet search on the subject of purchasing an annuity, you will find that there are a mind-boggling number of articles on whether or not this is a wise decision.

Of course, the debate is complicated, and both sides make valid points. Those who favor annuities usually cite the guaranteed income they generate, which can act like a pension, while those against them will point to high costs and a relatively poor ability to generate higher rates of return, compared to other available financial products.


 Elderly women speak to each other
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It may come as a shock to many heading into or planning for retirement, but there is a often unplanned but mandatory expense you must account for — your health coverage. In light of that fact, the decision on annuities may not be that complicated, after all. In fact, it just might be pretty clear cut — believe it or not — that purchasing an annuity is a very good decision.

On the surface, factoring in health-care costs may not seem like a big deal, but keep in mind that the average 60-year-old couple, who will likely live to about age 85 each, should expect to incur about $406,000 in costs for just their insurance premiums if they would like to be fully covered.

This may be a somewhat larger number than many people anticipate, and even worse is the news that the bulk of these health-care costs will be deducted directly from any Social Security benefit you may receive. In fact, these costs will consume about 40 percent of an average person's Social Security benefit.

This highlights, I hope, why the average U.S. citizen should consider purchasing an annuity. As a U.S. citizen, you must — under federal law — have health coverage or you will forfeit all Social Security benefits.

Health-coverage costs will eat up a large portion of your Social Security benefit, which means you will have to have another, preferably guaranteed, form of income to help offset this often unanticipated expense.

An annuity is an effective vehicle to help address this problem, as it does guarantee an income stream for a specific amount of time.

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Another reason why an annuity can serve retirees well? Medicare's Income-Related Monthly Adjustment Amount. What is this? It's an additional amount that you pay for your monthly Medicare Part D prescription drug plan premiums and your monthly Medicare Part B (outpatient or doctor visit coverage) premiums.

With a non-qualified annuity, there is a distinct possibility that the income generated from it will have some form of tax exclusion ratio. This means that a percentage of the income generated will not only be tax free but will also not count against you when Medicare calculates your income to determine if you will pay more for coverage or not.

If you do have to pay that surcharge for any reason, you need to be aware that this surcharge will also come directly out of your Social Security income, as well.

Studies conclude that less than 10 percent of Americans are factoring future health costs into their retirement plans. Additionally, if you consider that 53 percent of married couples and 74 percent of unmarried people rely on Social Security for 50 percent or more of their income in retirement, one could argue that the time to consider an annuity is now.

— By Dan McGrath, co-founder of Jester Financial Technologies