If you’re hoping to receive as much income as possible in retirement, then it’s important to understand how mortality credits can increase annuity returns. That’s because taking advantage of mortality credits could make the difference between a low (or no) income later in life, or an income stream that allows you to confidently continue your present lifestyle.
What are Mortality Credits and Why Do They Matter?
Mortality credits are also often referred to as mortality yields. With a participating annuity, the premiums that are paid by those who die earlier than expected contribute to gains of the overall “pool” of participants and provide a higher yield (or credit) to the survivors.
This higher yield is oftentimes more than what could be achieved through individual investments. In addition, it can increase substantially with age. So, mortality credits have the ability to hedge longevity risk.
Annuity expert Tom Hegna sums it up best when he tells a story about five elderly women who take a vacation together every year. One year, they decide to put $100 into a box, with each of the five contributing $20 apiece.
The following year when the ladies take their vacation, those who are still alive will split the money. So, if only four of the women remain to take the next trip, they will each receive a $25 cut.
Not a bad “return” for just one year.
But wait, there’s more!
If the women decide to leave the money in the box until the year after that – and at that point, if only two of the original five ladies remain – those women will receive $50 each, which represents a much higher return (i.e., reward).
So, mortality credits can matter a great deal – particularly to those who live a long life – as they can provide you with a higher amount of income down the road. This, in turn, can help your future income to keep pace with ongoing inflation over time.
How to Use Mortality Credits to Your Advantage in Retirement
Although the inner workings of annuities can be a bit confusing, discussing your options with an expert in these financial vehicles can allow you to more easily narrow down which – if any – annuity may be right for you.
At Annuity Gator, we know annuities well! Our focus is on educating consumers on how annuities work, and how they can provide a reliable, ongoing retirement income, regardless of how long you may need it.
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