In effect, immediate annuities function as a risk management tool that works like a mirror image of life insurance, which pays a benefit not in life but in death. Moreover, they are simple, easily understandable products offering nary a worry about payout distribution timing.
Let’s say you are someone roughly in your mid-60s who has thought more than once about buying an annuity but always found a reason not to. Their fees are relatively high, you thought, and they are not liquid. Even many annuities with equity participation offer only limited upside potential. The list of real or imagined drawbacks can go on and on.
On the other hand, you’re not getting any younger and the early 2022 stock market sell-off is making you nervous. It is unlikely to be catastrophic, as it was 14 years ago, but your net worth is nonetheless declining on paper — and who knows how the market will fare in coming years? Maybe you would also like to pay your bills with more breathing room.
It might be time to consider reallocating some funds to buy an immediate annuity, also called a single-premium immediate annuity or an income annuity, which pays a guaranteed income for life and starts almost immediately. The annuitant should be in relatively good health. The longer he or she lives, the better the return will be.
In effect, immediate annuities function as a risk management tool that works like a mirror image of life insurance, which pays a benefit not in life but in death. Moreover, they are simple, easily understandable products offering nary a worry about payout distribution timing.
Consider Buying an Immediate Annuity Later This Year
This product is worth considering, probably with a multi-month lag, despite historically low interest rates. This is because rates starting rising in 2022 and are almost certain to continue rising for at least a year because the Federal Reserve is fighting inflation. Many pre-retirees and retirees are tired of market volatility or have already pulled funds from the market and are looking for predictable ways to generate guaranteed income. Only an annuity offers this. You won’t have free access to your money anymore, but this is taken into account as part of your planning.
If this sounds good to you, there are two additional questions to ask. How much should you invest, and at what age should you do so, bearing in mind that people are living longer? As a starting point, consider investing about a quarter of your funds in an immediate annuity, which is enough to make a difference, especially if you want to use to help pay some bills. But it isn’t so much that it puts too big a dent in the rest of your investments, possibly including other annuities.
As for the best age in which to invest in immediate annuities, consider waiting until age 75 or so if you are in good health. This approach will get you a generous income stream based on your shorter life expectancy. This is a popular strategy, one that recognizes that payouts ultimately are driven less by interest rates and more by the insurance company’s estimate of how long you might live. In addition, weighting gives you a chance to see how your health holds up during your initial retirement years. If your health deteriorates a lot, you may decide that an immediate annuity isn’t such a good idea after all.
A Deeper Look at what Immediate Annuities Pay
A deeper dive into the relative attractiveness of immediate annuity payouts is instructive. According to ImmediateAnnuities.com, a 65-year-old man who invests $100,000 in an immediate annuity can currently receive about $6,700 annually in payouts for life. A 70-year-old man would get about $7,600 annually; a 75-year-old man about $9,300.
Couples tend to invest more and receive more. For a lump sum payments of $250,000, for example, a man and wife, both 65, can buy an income annuity today that will pay about $1,240 per month until they both die. The key question is this: Can this couple generate the same or higher income by keeping the $250,000 and investing it?
Assume that at least one of them lives to age 89 – a fair assumption based on life expectancy tables. They would need a steady return of 3.15% a year to receive $1,240 a month for 24 years before running out of money. Bear in mind that many seniors tend to overweight bonds. Even though bond rates have begun rising, they have long way to go to get to 3 percent, if they ever do. With an immediate annuity, this couple avoids the risk of not achieving this return and, more important, of living “too long” and running out of the cash to continue investing.
Some insurers offer immediate annuities with a cost-of-living provision to help keep up with inflation, but very few buyers opt for this because payouts drop drastically.
Check Out the Insurance Company’s rating and Your Cash Flow
In general, prospective insurers should be rated at least A-.
If you decide an immediate annuity is your cup of tea, you should first take a hard look at your cash flow and break down your spending into essential needs, such as property taxes, insurance, food, clothing and prescription drugs, and discretionary spending. Then add up other sources of guaranteed income, such as Social Security. If there is a gap between your essential needs and your guaranteed income, an immediate annuity at minimum should cover it.
If you’re still unsure whether an immediate annuity is best for you, one way to help make a decision might be to compare your annual Social Security income against the income and appreciation you receive over time by investing in the stock market. In the end, which do you prefer – the certain stream of Social Security payments or the periodic thrill of higher returns in the market?
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