Connect with us

Advisor

Pros and Cons of Immediate Annuities

Published

Pros and Cons of Immediate Annuities

1. How do immediate annuities stack up against alternatives for providing retirement income?

One of the biggest advantages to owning an immediate annuity (or any annuity) is that it can provide the opportunity to receive guaranteed income for life – regardless of what occurs in the market, or even in the economy overall.

Other financial alternatives may provide more or less income, based on what occurs in the market or what occurs with interest rates. Anannuity is the only financial vehicle that can guarantee that its owner will not outlive its income generating capacity.

As a negative, the funds that are inside the annuity are typically no longer available when the annuitant passes away. Therefore, there are no funds left to pass on to his or her heirs. Also, once the annuity’s stream of income is turned on, the decision cannot be reversed.

2. Is it a bad idea to get one during a period of low interest rates?

Some retirees may opt to wait until interest rates rise to obtain an immediate annuity. In some ways, this can make sense, as the amount of the payment an annuitant receives is based in large part on two factors – his or her age (the older they are, the higher the payment), and what the interest rate is at the time they annuitize (the higher the rate, the larger the payment amount).

However, the issue is that nobody ever knows when interest rates will rise – or fall. Therefore, an individual could essentially wait for many years for a rise in interest rates, only to have lost out on all those years worth of income payments.

3. What portion of a retirement portfolio would be appropriate for this option?

Because everyone’s exact income needs will differ, the actual percentage allocation that should be in immediate annuities will also differ in terms of how much is appropriate. However, in general, according to Wade Pfau, a professor at the American College who specializes in retirement income, the answer could be 50%.1

This is because, based on market conditions, a hypothetical couple that is age 65 would have the best chance of success in generating a 4% annual income when using a combination of 50% equities and 50% fixed annuities.2

4. Who should consider an immediate annuity and who should stay away?

Those who should consider the purchase of an immediate annuity are people who:

  • Are concerned about outliving their income in retirement
  • Have other liquid savings that they could use in case of an emergency
  • Have an average or above average life expectancy
  • Are using the immediate annuity as part of an overall plan
  • An immediate annuity is not the ideal option for you if:
  • It is the only money you have and you will have no liquidity for emergencies or cash needs
  • You want to leave a legacy for your heirs
     

5. What are the key issues when shopping for one?

When shopping for an immediate annuity it is important to ensure that the product you purchase is the right one for you. All immediate annuities are not created equal, so be sure to shop for the product that is best for your specific goals and needs.

Going through an independent agent who can help you compare the rates can be extremely beneficial in helping you find the best option. An indepedent agent should be able to shop several arriers to find you the best payout options.

6. Are options like inflation features and return principals worth paying for?

Various options such as inflation could be worth the additional premium – but only under certain circumstances. Here is why. The Cost of Living Adjustment, or COLA, that is referred to by insurance companies may mean one of two things.

It could either be a level percent increase in your income payment, or it could be a true Bureau of Labor Statistics derived Consumer Price Index adjustment. If your COLA is based on the latter, it could in fact either increase or decrease, depending on the government’s reported change in the CPI index for that particular year. Therefore, if you are offered the level type of COLA, then it could be worth the additional premium cost. Otherwise, probably not.

Regarding that, and any other annuity rider that may be offered, it pays to read all of the fine print in order to really understand exactly what it is you are getting for the additional dollars you are putting into the plan.

Sources:
1. Annuity Guys 
2. Annuity Guys 
Continue Reading

Trending