Finding Income in Retirement
An immediate annuity offers a guarantee for those fearful of the stock market
You should not hurry into a decision. For one thing, annuity payouts are tied to long-term interest rates, and those may be headed upward. Payments are also tied to age, just like Social Security. So by waiting even five years to sign up, you can increase your monthly income significantly, says Tim Vander Pas, head of annuity product management at Allstate Life Insurance Co.
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At Allstate, a 65-year-old male could currently purchase a $100,000 single-premium immediate annuity and receive $622 a month for life. But a 70-year-old who buys the same annuity gets $712 a month.
Of course, some retirees can't afford to wait to start receiving income. If that's the case, consider buying a small annuity now that's enough to cover basic expenses, such as rent and food. Then, if your income needs increase, you can always purchase another annuity contract to supplement the current one.
"One of the things we've advocated is laddering your income annuities, like you would CD s or bonds," says Drew Denning, a vice president for income management at Principal Financial. "So maybe you break your purchase into three chunks, with a portion bought one year, another bought the next year, and a third bought a few years after that."
Consider using different providers for each annuity. You are entering into a long-term contract, and since there is no way to tell with absolute certainty if your insurer will be around 35 or 40 years from now, it pays not to put all your annuity eggs in one basket. Stick with insurers who have strong financial profiles, such as those rated AA or higher, says Reichenstein.
And think twice about all the add-ons, says Rob Nestor, a principal with the Vanguard Group. While inflation kickers might sound attractive--after all, everyone wants to keep up with the cost of living--bells and whistles can be expensive. At Vanguard, a 70-year-old who buys a $100,000 immediate annuity can expect around $9,000 a year for the rest of his life. But an inflation-indexed contract at Vanguard would begin with a payment of about $6,750, which then would adjust up annually as prices rise. "That's a pretty big haircut," Nestor says.
Remember, annuities are supposed to be only one part of a diversified overall retirement plan. You can always use the other half or three quarters of your money to invest in a mix of bonds and stocks, which is a natural hedge against inflation.
Annuities 101
A single-premium fixed immediate lifetime annuity is an insurance contract that promises to convert an unpredictable asset--an investment portfolio of stocks and bonds, say--into a predictable stream of income at retirement.
The term single premium refers to the fact that you pay with a lump sum.
Fixed means the income will not fluctuate over time (though now you can buy inflation-adjusted annuities).
Immediate means the insurer will cut you the first check soon after you purchase the annuity.
And lifetime means you will keep receiving that income even if you live to 120.
The level of monthly income you receive will depend on three things: prevailing market interest rates, your age, and your gender, as women tend to live longer than men.
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