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Mortality Credits Make Immediate Annuity Hard to Beat


Retirement Guru Walter Updegrave says that an immediate annuity product is always going to beat your investments. While he admits that immediate annuities aren’t for everyone, most people do much better with the guaranteed income from an immediate annuity than they do trying to create income using the 4% drawdown method on their investments. In the Next Avenue article, “A Guaranteed Income Source to Beat Your Investments,” Updegrave said that morality credits are the one unique annuity advantage that cannot be replicated with investments. His article is based on recent research from Mark Warshawsky, a former U.S. Treasury Department official.

You don’t need an immediate annuity if you will meet all of your retirement income needs through Social Security or pension income. People who are unwilling to relinquish access to their money after buying an annuity are also unfit candidates for the products. But immediate annuities are worth considering if you don’t fall into the above categories. Warshawsky’s research found that an immediate annuity is more likely to provide you with lifetime income than the strategy of making 4% withdrawals from your investments. The main reason for this is that immediate annuities offer mortality credits, which pay you out more based on the fact that some annuity holders die prematurely. The annuity payments they would have received are divided up among annuity holders who live a long time. So your annuity return includes this bonus in addition to your own investment gains and return of premium. You cannot get this kind of return from any other investment.

The article offers two examples of what a 65 year old man can do with $100,000 at age 65 to generate lifetime income. He could purchase an immediate annuity, which would pay him approximately $565 monthly for the rest of his life. Or he could invest the money conservatively. If he invested in 10-year Treasury bonds, his money would run out at age 83. There is a good chance that a 65-year old man will live past age 83, so that would really put him in a bind. If this man invested his money and earned 4% per year, the money would last until he was 87. If he earned 6% per year, the money would take him to age 98. Not only are high returns harder to find in this financial market, there is no guarantee that he wouldn’t lose this money rather than earn a return. That is a risk that you might not be willing to take when trying to create lifetime income.

People in poor health are not likely to benefit from an annuity offering lifetime income because they don’t have that many years to receive income. But if you are in good health and looking to create a lifetime stream of income for retirement, an immediate annuity is worth careful consideration. Shop around for the best annuity and make sure that you are purchasing from an insurance company with strong financial strength ratings. The current low interest rate environment is causing many people to ladder their annuity purchases over time in hopes that interest rates will increase. You are unlikely to match the benefits offered by an immediate annuity product by investing on your own and withdrawing 4% per year.

Written by Rachel Summit

Follow Rachel, aka Finance Mama, on Twitter and Google+


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