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fsgmichigan.com 31 CHAPTER 5 PENSION ALTERNATIVES For example, assuming a traditional yield curve, you can expect a higher interest rate for a longer commitment (i.e., committing to a 5-year annuity will earn you more than a 3-year policy). However, when interest rates are increasing it may not make sense to tie up your money for that long. In contrast, if you believe interest rates will be falling, and you have enough in short-term savings, the higher rate of a longer-term investment may make sense. An income annuity is an option for those who want the worry-free income that pensions used to provide. Often referred to as a "personal pension," the income annuity is essentially the privatized version of this once beloved employee benefit. With a pension, you and your employer would typically pay into the plan during your working years. Once you're ready to retire the benefit is calculated and you can receive an income that is predictable and guaranteed by the pension provider. An income annuity is very similar; you can fund your annuity with regular contributions or trade a lump sum and in return receive an income stream that lasts for life and is guaranteed by the insurance company you purchased the contract from. Here are some things to consider if you are looking at purchasing an annuity: First, choose a reputable and financially stable insurance company to work with. Don't be blindsided by ultra-competitive interest rates from fly-by-night insurance companies. You want to be sure that the company guaranteeing your income will be around longer than yours. Moody's, Fitch, AM Best, and Standard & Poors are all credit rating agencies for insurance companies. You can refer to these rating agencies to get a sense of your insurer's financial strength. 1