| WASHINGTON, April 20
WASHINGTON, April 20 Suddenly, everyone is
talking about immediate annuities as if they were the answer to
every retirement question.
Unions and other fans of traditional pensions like the
guaranteed income stream these products promise to retiring
workers. Employers, with the Obama Administration's
encouragement, are trying to figure out how they can offer
annuities to workers who are ready to withdraw money from their
401(k) accounts. Academicians are churning out studies about
how immediate annuities can boost the lifestyles of retirees.
And annuity companies, of course, would be happy with even a
slice of the $17.5 trillion (yes, trillion with a "t") sitting
in retirement accounts, according to the Investment Company
An immediate annuity is an insurance product that allows
you to trade a lump sum of money for the promise of regular
income for life. For example, a 65-year-old woman putting
$100,000 into an immediate annuity today could draw $690 a
month for life, according to AnnuityRateShopper.com. If,
instead, she were using a reputable "safe withdrawal rate" to
pull money out of her own $100,000 account, she'd be limited to
about $333 a month in her first year.
People who buy immediate annuities are effectively pooling
their risks with everyone else buying the same annuity; that
enables them to get a bigger annuity payment every month than
they could take from their own savings, if they wanted to make
sure those savings would last a lifetime.
Furthermore, having some money tucked away in a guaranteed
fixed annuity allows retirees to be a little bit more
aggressive with the rest of their money, putting more money
into stocks that should, if history continues to repeat itself,
promise greater returns over the long term.
Sounds good, right? But before you hop on that bandwagon,
think about this: Annuities can be expensive. They are
particularly unrewarding now, because they are priced on the
basis of interest rates, which are near historically low
Spending too much on annuities could hurt your ability to
pay healthcare costs or field other emergencies in your
retirement. And you could lose money buying the wrong annuity.
Here is how to balance the good and the bad, and avoid
self-destructive annuity choices.
-- Don't annuitize all of your money. Even the folks who
sell insurance would tell you that you have to keep some money
under your own control for big emergencies or special expenses.
Some advisers tell their clients to annuitize as much as they
would need to cover their regular monthly expenses, like rent
and utility bills. Others have suggested limiting annuities to
15 percent or so of your total savings. Fidelity Investments
(here) and MetLife
(here), both of whom sell annuities,
have calculators on their sites to help clients figure out
their proper level of annuitization.
-- Don't annuitize all at once. To figure out how much your
annuity will pay you every month, the insurance company
considers several factors, including your age, how much money
you are putting into the annuity, and what the current interest
rate is. By waiting before you annuitize, you will get a bigger
monthly payout because you'll be older and have fewer years of
life expectancy left. But you may also get a bigger payout
because interest rates in general are low by historical
measures now. The solution? Ladder into an annuity just as you
would a bond or certificate of deposit portfolio. Break up that
portion of your nest egg you intend to annuitize and lock some
up now, and some later.
-- Don't forget about inflation, or your spouse. The example
above shows that annuities pay out far more than the safe
withdrawals from a single portfolio. But those self-directed
withdrawals should be able to grow annually with inflation and
the portfolio; most fixed annuities don't. You can shop for an
annuity that offers inflation protection, or make sure that you
have a backup plan (extra assets that you could sell down the
road, for example), to make sure your income will keep with
rising prices throughout your retirement. If you have a spouse
who might depend on that same income, consider paying more for
a joint life annuity, or one that guarantees income for 10 or
20 years after you purchase it.
-- Don't buy the first annuity you are pitched. It's
conventional wisdom in financial planning circles that
annuities are "sold, not bought." That means that charming
salespeople account for far more annuity sales than careful
retirement planners. And that could signal annuities replete
with hidden fees and commissions. Several companies like
Vanguard Investments, Charles Schwab, and Fidelity are seeking
to sell lower-cost annuities. You can try those companies, and
also compare quotes on websites like AnnuityAdvantage,
ImmediateAnnuities.com, and AnnuityFYI.com.
(The Personal Finance column appears weekly. Linda Stern
can be reached at linda.stern(at)thomsonreuters.com)
(Editing by Matthew Lewis )