Insurance for Old Age: Are Annuities A Good Idea?
Having income to supplement Social Security benefits that lasts your entire life, no matter how long you live, is a challenge for many seniors. If you don't get a sizable pension from an employer, but you have some savings built up in retirement accounts, "longevity insurance policies," better known as annuities, might be worth considering.
This article focuses on immediate annuities that provide income that starts right away, and lasts over your entire lifetime. (There are deferred annuities that younger investors purchase for later payouts. This type often has a reputation for high sales costs and poor investment performance and is not the topic of this article.)
When you buy an immediate annuity, you give up control of a hefty lump-sum of your retirement savings and you can't change your mind and get your money back once you buy it. When you and your beneficiary die, no money goes to your heirs.
In exchange, annuities pay you a monthly income for the rest of your life, an income that can last 20 or 30 years. There are joint and survivor type annuities that continue the monthly income to your spouse after your death, and you can also buy annuities that have a 3 percent annual cost-of-living adjustment.
There are immediate fixed annuities — the amount of the monthly payment does not change, and immediate variable annuities in which the monthly income is adjusted to the rate of return on stocks, bonds and cash investments held by the annuity.
When shopping for an immediate fixed annuity you need to look for how much monthly income your investment will buy, and the safety of your insurance company. Here are some points to consider from Steve Vernon, a retired consulting actuary, and author of Money for Life: Turn Your IRA and 401(k) Into a Lifetime Retirement Paycheck.
- Get quotes from 5 to 10 highly-rated insurance companies. Make sure you are getting apples–to–apples comparisons for the same type of annuity.
- Investigate insurance company ratings. You want a company that will still be here 30 years from now when you are. Check with rating agencies like Standard & Poor's or A.M. Best and only do business with insurance companies having the highest two ratings.
- Understand how sales commissions affect your payout. Sales commissions come out of your investment. The higher the commission the less monthly income for you. Make sure the amount of monthly income quoted is net of sales charges.
- Diversify if you can. If you have the savings, it might be wise to spread your investment between two companies or consider having a portion of yours savings in fixed annuity and a portion in a variable annuity.
Resources:
Retirement Planning Guide: http://moneyforlifeguideonline.com/index.htm
Money for Life: Turn Your IRA and 401(k) Into a Lifetime Retirement Paycheck, Steve Vernon, September 2012.
