Immediate Annuities Offer Security, But Tread Carefully
Humberto Cruz - Savings Game
Q: I am 63 and retired. I'd been skeptical about income annuities because I thought they were too conservative. I receive a good pension and Social Security.
Last August, after a long talk with my financial adviser, I used $400,000, about half my portfolio, to buy an immediate annuity. It pays $2,568 a month as long as I live, with payments guaranteed for 15 years (even if I die before 15 years have passed).
In retrospect, following the stock market's steep decline, I think it was just about the smartest financial decision I ever made. Did I do the right thing?
A: I like immediate annuities (I own three) for the lifetime income and peace of mind. But I would have done some things differently.
An immediate or income annuity is an insurance product that turns a lump sum premium into lifetime income. (They should not be confused with deferred variable annuities, which are investment-insurance products that can be quite complex and often charge high fees.)
Many people hate "giving up" their principal to an insurance company, and immediate annuities had been slow to catch on. But amid the stock market meltdown, sales of these annuities rose 30 percent to an estimated $8.6 billion last year. Ironically, more people are buying at a time when paltry interest rates lower immediate annuities' lifetime payouts.
As to your question:
I would have opted for a "joint-and-survivor" payout option, with payments continuing until both you and your wife die, recognizing that payments would be lower.
By selecting the 15-year guaranteed period, you made sure your wife gets more than the $400,000 principal back if she lives that long and you don't. But the main purpose of immediate annuities is to protect against "longevity risk," or living so long that you run out of money. Women on average live longer than men, and your wife's payments would stop in the year 2023 if you die before her. If you two were fine with that decision, though, so am I.
Having both a pension and Social Security (both are lifetime annuities), I would not have committed half my portfolio to an income annuity at the relatively young age of 63 and during a period of low interest rates.
I would have considered an annuity "ladder," buying for example a $100,000 annuity every year for four years. That way, payouts for future annuities increase if interest rates rise. Even if interest rates stay the same (they have fallen since you bought but don't have much more room to fall), payouts are higher the older you are when you buy an income annuity.
I don't know whether you or your adviser compared annuity payout quotes from different insurance companies (you told me he works for one, and that's the one he recommended). Web sites such as www.immediateannuities.com let you compare payouts from many companies.
Your adviser does work for a company with the second highest financial strength rating from A.M. Best, the best-known rating firm. Did you know that? For an explanation of ratings, see Web site www.ambest.com/ratings/guide.asp, I prefer buying only from companies with the two highest or "superior" ratings from A.M. Best. All annuity guarantees are backed by the insurance company issuing them.
For added safety, I would have bought annuities from different insurance companies so none exceeds the state guaranty association coverage limits if the insurance company goes bankrupt. The limit, which varies by state, is $300,000 in Wisconsin, where you live. See the Web site of the National Organization of Life and Health Insurance Guarantee Associations (www.nolhga.com) for details.
Investors Near Retirement Age Face Big Challenges
Mark Miller - Retire Smart
New data shows just how steep a climb older investors face in attempting to recover from the market crash. It appears that younger retirement investors are faring much better than those near retirement age in bouncing back from last year's market crash.
Avoid These Personal Investing & Financial Gaffes
Andrew Leckey
People want to read about how to make money, not how to avoid losing money. The depth of this recession, however, makes capital preservation every bit as important as positioning yourself to make money as the economy improves. Investors typically make mistakes during this murky in-between economic period.
How to Check Your Life Insurer's Health
Kathy Kristof
If you want to know why it's important to know the health of your life insurance company, ask Vince Watson. His daughter, Katie, was left severely disabled and in need of 24-hour care. The life insurance policy that was supposed to pay for Katie's care for the rest of her life. But less than a decade later, the insurance company failed and the Watsons learned a hard lesson about the limits on life insurance company guaranty funds.
Choose an Investment Professional Carefully
Andrew Leckey
When it comes to selecting an investment professional, trust is a relative term. Many investors understandably feel a need for additional help in navigating today's volatile markets and economy. That means carefully checking out individual securities brokers or financial planners to find those who merit their confidence.
If Retirement Planning Is a Game Show, Most Couples Are Failing
Mark Miller - Retire Smart
The Fidelity Investments Couples Retirement Survey results should be embarrassing for anyone age 45 to 72 who is married (the range of ages studied). It seems husbands and wives are doing a remarkably poor job of communicating, managing and planning for retirement.
Suze Orman: Why the Recession is a Good Thing
Kimberly Palmer
Since the financial crisis began, Suze Orman -- the queen of personal finance -- has been criticized for everything from her conservative investment choices to not having predicted the recession. An interview with Suze Orman and her thoughts on the recession and personal finance.
Recession Forces Bad Choice:
Filing Early for Social Security
New federal government data shows that applications for Social Security benefits are running well ahead of the rate expected due solely to aging of the population. The most likely cause is the recession and layoffs of older workers who, in turn, decide to throw in the towel on work and retire earlier than planned.
Pick a Financial Planner Carefully
Humberto Cruz
Different types of financial planners are held to different standards. I strongly recommend you use a planner (such as a CFP or RIA) who adheres to a "fiduciary standard." ...
Immediate Annuities Offer Security, But Tread Carefully | Retire Smart
(c) 2009 U.S. News & World Report