When is the Best Time to Buy An Immediate Annuity
A white-knuckle stock market ride since May has rekindled interest among readers at or near retirement age for immediate annuities that turn a lump sum premium into a guaranteed income for life.
But many wonder, is this a good time to buy?
"Do prevailing interest rates affect the price of an immediate annuity?" asked a reader from
Yes, it is. The lower interest rates are, the higher the annuity premium will be because more money is needed to generate the income.
Other factors that affect the premium include age and gender, which determine average life expectancy (women tend to live longer than men). The longer you're expected to live -- and therefore, the more payments you're expected to receive -- the higher the premium will be, others things being equal.
Determining the premium for a particular income stream may involve 30 different calculations for an annuity expected to pay out for 30 years, said
Do not confuse immediate annuities with variable deferred annuities, which are complex products that offer mutual-fund-like investments in a tax-deferred insurance wrapper. Many variable annuities -- although not all -- charge high fees and should be avoided.
By comparison, immediate annuities are recommended by many financial professionals and academicians, and are relatively low-cost (administrative costs and the insurance company's profit margin are factored into the quoted premium and payout). A recent paper by the
But do it now or wait for rates to rise?
The case for waiting: In
The case for not waiting: Rates may stay down or even go lower, and the money we need to set aside and keep safe for the future premium would earn next to nothing while we wait. Also, medical advances may lengthen average life expectancy in the future, lowering annuity payouts. A better solution may be "laddering," or buying smaller immediate annuities periodically (every year or two, for instance) rather than buying a large one when rates are so low.
This is a complex topic and I have run out of space. I'll address a multitude of other issues about the decision to annuitize or not in a future column.
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