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Immediate Annuities Work for Some, Deferred for Others


If you’re a regular reader of this blog, you’ll notice that from time to time basic annuity information is repeated.  This is not only for new readers of the blog, but also for a different opinion and viewpoint on annuities from a new source.  Today, I’ve gotten The Boston Globe’s take on using annuities to guarantee a stream of retirement income in their article “Fitting annuities into a retirement plan.”  The most difficult prediction that you will need to make regarding your life savings is how long it will need to last throughout your retirement.  While the exact time frame will never be known, guaranteeing lifetime income with an annuity allows you the security to know your savings will last as long as you need them to.  You do need to be careful when you are choosing the annuity product which will be best for you though.

Annuities offer investors a secure piece of mind because they are insurance protection against outliving your money.  Despite the fact that some products have high fees and critics believe that you can find better investment returns elsewhere, the benefits offered by annuities make them an important part of your retirement plan.  The Boston Globe reiterates an important point that we’ve made in the past.  Annuities are best suited as one part of your retirement plan.  Part of your savings invested in an annuity will ensure guaranteed lifetime income when the right annuity is chosen.  Choosing the right annuity can be a process, but it is well worth the time you invest to find the right annuity for your lifestyle.

Whether you need the annuity funds now or at some point in the future is the first decision to make regarding your annuity purchase.  Immediate annuities start paying you monthly income soon after your initial lump sum payment of purchase.  You can look at immediate annuities as an insurance policy protecting you against outliving, or even against outspending, your lifetime savings.  One risk of an immediate annuity is that you will die soon after purchasing it and your money will go straight to the insurance company.  While this is a valid concern, it is unlikely and the same scenario doesn’t keep people from buying car insurance or homeowners insurance.  You can pay car insurance every month for 50 or more years and be lucky enough to never get in a car accident and need to use that insurance.  It isn’t going to keep you from having the protection in case the need arises though.

Your other annuity choice is a deferred annuity.  You’ll start receiving payments from a deferred annuity at some predetermined point in the future, typically at a certain age.  During the savings phase before you begin receiving payments, you hope that your money will grow in value at either a fixed rate or one dependent on the markets.  In the withdrawal phase, you receive your monthly payments just like with an immediate annuity.  Deferred annuities also have a surrender period, so that you can take your money out without penalty as long as it has been a certain period of time.  Some people use this factor as their main reason why they prefer deferred annuities to immediate annuities, which are more of a commitment.

Some of the criticisms about deferred annuities are that they have high fees and are inflexible, similar to the complaints about immediate annuities.  While immediate annuities may maximize retirement income better, according to Boston College’s Center for Retirement Research, deferred annuities allow investors who like risk to go for a bigger annuity payback in the future.  There are more choices in the type of annuity you can get, some with more risk than others.

Variable annuities invest your money into different market investments with the goal of earning you more than a conservative fixed annuity offers.  They are riskier because with the potential for a market increase, you also get the potential for a market decline.  Some financial advisors don’t think the benefits of variable annuities outweigh the costs because some products have high fees and are quite complex.  But the right variable annuity for you from the right insurance company can be a great investment for your future.

Inflation is another concern faced by investors.  A guaranteed lifetime income payment now may not cover the same expenses after a few decades.  Some annuities work in inflation increases with your payments.  Although your payments will be lower to start with than other annuities, your expenses will also be lower based on anticipated inflation expenses decades down the road.  Period certain annuities offer death benefits to your heirs in the event that you die before receiving the money you were guaranteed in your annuity’s terms.  This is a good product for investors with a real fear of losing their money to an insurance company if they die sooner than they expected.

Interest rates are low right now, which means that annuity rates are also low.  Your payments will be based on current market annuity rates, so some advisors are having their clients ladder their annuity purchases.  This basically means that you purchase new annuities every so often in hopes that your next purchase will lock in a higher interest rate and therefore, higher annuity payments over your lifetime.  Annuities are definitely complicated and need the expertise of a professional before being purchased.  They can be a great vehicle to use for retirement once you find the annuity product that meets your needs.

Written by Rachel Summit

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