With the Market So
Uncertain, Are Immediate Annuities A Good Way To Preserve Your Retirement Savings?
One day, the market is up 400 points. The next
day, down 300. Stocks in 2008 haven’t won any points for stability. In periods of
market uncertainty, you’ll hear a lot about safe harbor investments that will
supposedly guarantee income for life. One of
these alternatives is an immediate annuity.
Here’s how they work. Any annuity is a contract offered by an insurance
company that promises you a set amount of annual income for life. An immediate annuity is
an insurance contract you put money into and soon after starts paying a portion of the
agreed-to amount on a set schedule. Retirees who use this option successfully are not
pouring their whole retirement savings into an annuity – optimally, they are breaking
off only a piece of their retirement savings to place in this option. For example, a
65-year-old individual might buy an annuity with $100,000 or more that will come back to
her in predictable form – maybe $6,000 or $7,000 a year for the rest of her life.
This option is a good one if you luck out and
buy one at age 65 and live past 90 – that way, you’ll pull out more money than
you put in. But depending on how the annuity contract is written, if you die before your
principal is paid out, that money may go into the pocket of the insurance company.
As with other aspects of your retirement
strategy, it’s a good idea to discuss such a move with trusted financial experts such
as a certified public accountant or a financial planner such as a CERTIFIED FINANCIAL PLANNER™ professional. It makes sense to ask the
following questions of your own financial circumstances and the annuity product you’re
considering:
Before
you lock up money in an annuity, how well are your other retirement assets working for
you? Perhaps you plan to work a significant number of years in retirement if your
health and your will hold out. Those are two big “if’s.” But if you want a
part of your retirement money to be “secure,” you still need to have a
substantial portion of your assets continuing to grow for you as your life continues. A
visit to a CFP® practitioner before you retire can help you balance how you invest your
assets as you age.
Does the
immediate annuity have inflation protection? It’s not a big surprise to know that
$6,000 today won’t be worth $6,000 five years from now. See if the immediate annuity
product you’re considering automatically increases your payout each year in
accordance with inflation.
Does
it make sense to ladder annuities based on your age? If annuity products make sense
for you and you have the financial freedom to purchase more than one, it might make sense
to buy them in staggered form with amounts and terms that allow you to get larger payouts
as you age. That could keep other assets more liquid to invest for your heirs or for other
purposes. It’s also a good idea to go with more than one AA-rated (or higher) insurer
since the fortunes of such companies may be great now but can change later. Also, remember
that immediate annuities can be bought with specific terms such as 10 or 15 years that
would allow your estate to recoup unspent assets if you die before the end of that payment
term. It’s very important to seek advice here.
Have you projected what your
actual income needs will be? Again, you need to ask yourself
whether you choose to work or not, and then what your living expenses might be in
retirement. This is why an annuity decision should be discussed from both a tax and
general financial planning standpoint.
Are your long-term care needs
covered? Before
you start talking about locking up assets in annuity products, make sure you have money in
reserve or long-term care insurance in place should you need to pay for temporary
disability or end-of-life care.
Are you fully informed about all
the fees? Keep
in mind that inflation protection and other features added on to an immediate annuity cost
more money than those without. Compare the costs.
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This column is produced by the Financial Planning
Association, the membership organization for the financial planning community, and is
provided by Charles Lewandowski, a local member of FPA |
