At Annuity FYI, we frequently get phone calls from investors and financial advisors alike asking us if folks over the age of 85 should be investing in annuities, and if so, which products are available to those investors. In this tutorial, we will look at the appropriateness of fixed, immediate, and variable annuities for investors 85+ with four typical goals in mind: providing income, capital preservation, capital appreciation, and protecting the investment for heirs.
For the sake of comparison, we will use an 85-year-old male investing $100,000. According to the Center for Disease Control, such a person will live, on average, an additional 6.5 years, to 91.5 years of age. But remember, this tutorial is for the sake of comparison and education only – every investor is different, which is why you should speak with a financial advisor who specializes in annuities before making an investment decision. In particular, you must make sure that any surrender penalties that come with many annuities will not interfere with your income needs. If you don’t know of an advisor who specializes in annuities, Ask Annuity FYI or Find a licensed financial professional in your area.
Read on to find out exactly what types of annuities are right for investors over 85, whether they’re suitable for you, and if so, how to find one that best fits you and your financial situation.
IMMEDIATE ANNUITIES WITH LIFETIME INCOME GUARANTEES
First, let’s look at immediate annuities that guarantee an income stream for as long as you live. At the time of this writing,you could invest $100,000 in an immediate annuity at age 85 that would pay you $12,000 per year for life. So if you lived the statistical average of 6.5 years, you would have received $78,000 – making this a terrible investment. Now, we speak with investors every day who say “I’m healthy and my parents and their parents all lived to be 100 years old.” Well, with this lifespan, you would receive $180,000 from the immediate annuity. While this is a better return on your investment, we would never recommend that an investor gamble in such a way with their retirement savings. In short, immediate annuities with lifetime income guarantees are generally not good investments for those over 85 – they do not provide sufficient income for folks 85+, and don’t allow you to pass income or principal to your heirs.
PERIOD CERTAIN / CASH REFUND IMMEDIATE ANNUITIES
“Period certain” is a term that means the payments from the insurance company are guaranteed for a pre-determined length of time. Say you bought a $100,000 immediate annuity with a 15-year period at age 85. At the time of this writing, you’d receive about $7,800 annually, guaranteed for 15 years. If you die before the 15-year period is over, your beneficiaries will receive $7,800 annually for the remainder of the period. So your $100,000 investment will have returned $117,000, or about a 1.1% annual return. This is not such a great return, but you could weigh it against other investment options, as well as the piece of mind of guaranteed income.
An immediate annuity with a cash refund option guarantees your beneficiaries the difference between the initial investment and the amount paid out, should you pass away before receiving at least your initial investment as income. Say you bought a $100,000 immediate annuity with a cash refund option at age 85, which at the time of this writing guarantees about $8,500 annually. This is an income stream you cannot outlive. However, should you pass away at age 90, having only received $42,500, your heirs would receive a check for $57,500. An immediate annuity with cash refund option may be a viable investment choice if you are interested in receiving income as well as ensuring that your money would be passed onto heirs.
CD-TYPE FIXED ANNUITIES
CD-Type fixed annuities guarantee a specific rate for a pre-determined length of time. While at the time of this writing fixed annuities pay relatively low rates, when you invest in one you are guaranteeing your capital and have a known, fixed rate of return. As such they can be a viable investment options for investors 85+. Just be sure that you only consider fixed annuities that waive any surrender penalties upon death (you don’t want your heirs to pay surrender penalties if you die within the surrender period), as well as fixed annuities with no “market value adjustment” (while we generally recommend products with a market value adjustment, they are inappropriate for older investors as surrendering these contracts early can devastate their value).
VARIABLE ANNUITIES WITH LIFETIME INCOME BENEFITS
Variable annuities with lifetime income riders are very popular, as they allow an investor to participate in stock market gains, while guaranteeing income one cannot outlive. There are very few insurance companies that will issue a lifetime income rider to someone 85+, but we are going to discuss them anyway because we get so many inquiries about them. Let’s take a variable annuity with a typical lifetime income benefit rider of 5% withdrawals for life at age 85. Your $100,000 investment would guarantee a minimum of $5,000 annually for the rest of your life, regardless of market performance. Following the CDC’s life expectancy, you could expect to receive about $32,500 from the annuity by age 91.5. The remaining account balance would be lost, not passed onto your heirs. Generally speaking, lifetime income benefit riders don’t provide enough income for folks 85+ and as such we don’t recommend them for folks over 85.
VARIABLE ANNUITIES WITH RETURN OF PREMIUM DEATH BENEFITS
With a variable annuity with a return of premium death benefit, if your account value appreciates over time you and/or your heirs are entitled to those gains. If the value declines due to poor market conditions, your heirs would still be guaranteed the initial premium amount, less any withdrawals (most annuities allow you to withdraw up to 10% of the account value per year even if you are within the surrender period). For example, say you purchase a variable annuity worth $100,000 with a return of premium death benefit. You pass away six years later, and even though the account value has dropped to $77,000 because of poor market conditions, your heirs would still be guaranteed $100,000 (assuming you took no withdrawals). Variable annuities with return of premium death benefits may be viable investment options for investors 85+ because they allow you to participate in market gains, withdraw a portion of the account value every year, and at a minimum, guarantee your heirs will receive at least your principal less withdrawals upon your death.
Generally speaking, Annuity FYI believes that some types of annuities and annuity riders are inappropriate for investors 85+; others are potential very viable investment vehicles as they can provide income, capital preservation, capital appreciation, and protect the investment for heirs. Investors 85+ need to take particular care that any surrender penalties do not interfere with income needs, and to discuss potential investment into an annuity not just with any investment advisor, but one who specializes in annuities. If you don’t know of one, Ask Annuity FYI or Find a licensed financial professional in your area.
|Type of Annuity/Rider||Ability to Take Income||Protection of Initial Investment||Ability to Participate in Market Gains||Protect Investment for Heirs||Worthy of Consideration for 85+ Investors?|
|Immediate: Lifetime Income||–|
|Immediate: Period Certain||–|
|Immediate: Cash Value||–|
|Variable: Lifetime Income Benefit Rider|
|Variable: Death Benefit Riders|