The Savings Game

For retirees, an annuity might make sense — but there are disadvantages

By Eilliot Raphaelson
April 22, 2011

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Many retirees are unhappy with the rates of return on conservative investments such as certificates of deposit and Treasury instruments. They would like higher returns, but they remember 2008, when most investments lost a great deal of value. Accordingly, they have a legitimate fear of riskier investments.

Readers ask how they can be guaranteed regular income so they do not have to be concerned about depletion of their assets in their lifetime.

Many financial planners recommend immediate-pay annuities as part of the answer. I agree that, for many retirees, this makes sense. In general, I am not a big fan of annuities; many are purchased for the wrong reasons. This type of annuity can help some retirees, but understand the disadvantages.

An immediate-pay annuity is purchased with one lump sum, and it has a specified payout plan that can start immediately. You can elect a guaranteed payment for your lifetime only, or for yours and your spouse’s. The more options you select, the lower your guaranteed income.

You can make this purchase with after-tax funds, or with a tax-free rollover from your 401(k) or individual retirement account (IRA). If you have been saving in a tax-deferred annuity, you can exchange it for an immediate-pay annuity.

Fortunately, selecting the best immediate-pay annuity is easy because of an excellent website, Fill in its quote-generator tool with your sex, age, state and the amount you want to invest to obtain price quotes for 11 types of annuities. (No insurance agent will call you, unless you request it.)

For example, a man born April 1, 1946, residing in Florida, with $100,000 to invest might be interested in getting quotes for (1) a lifetime annuity with no beneficiary with payments starting in one month and (2) a lifetime annuity with guaranteed payment to beneficiaries for 10 years.

For the first scenario, about 20 insurance companies with top ratings quoted a range of monthly income between $576 and $648. If you are satisfied with the company’s rating, there is no reason not to select the highest income.

For the second scenario, the range of monthly income was $574 to $628. A 10-year guaranteed payment reduced the income slightly. This option will ensure that your beneficiaries will receive a payment from your annuity after you die. There are many options, such as protection for your spouse, or payment only for a specific time frame, such as 10 years. If you select “inflation protection,’’ your income would be about $200 a month less.

You lose flexibility with an annuity because once you purchase one, you can’t change your mind. Most advisers don’t recommend investing more than 50 percent of assets in an annuity.

The main advantage is guaranteed income. The main disadvantages are a decrease in liquidity and flexibility and fewer estate planning options.

Elliot Raphaelson can be reached at