Should You Annuitize Your Retirement Savings?
So you've done it. You've saved a big pot of money for retirement. And now you need to make sure that money lasts as long as you do. Annuities, in their simplest form, insure you against a long life that outlives your assets. Here is how to decide whether an annuity is right for you.
What's in a name? There are several types of products with the annuity name that serve very different purposes. Fixed or immediate annuities provide guaranteed lifetime income. Deferred or variable annuities are asset accumulation products that sometimes have high expenses.
"An immediate annuity can be a good investment for seniors because there's no surrender charge and you immediately get a stream of income," says John Gannon, vice president for investor education at the NASD. As long as that insurance company is around, you will get a fixed income amount for the rest of your life. "Deferred annuities don't necessarily do that for you," says Gannon. "And most people never use them in annuitization."
Find a reputable company. "Make sure you are dealing with a reputable and financially strong insurance company," says Jack VanDerhei, an Employee Benefit Research Institute fellow. VanDerhei recommends that you check your state insurance commissioner's website and ask for a consumer guidebook. You can also contact one or more of the ratings agencies to see if the company is financially sound.
"Be very wary of anyone who is trying to personally solicit you to purchase an annuity," says Casey Rothschild, assistant professor of economics at Middlebury College. "There are a lot of annuity products out there that are not designed in the best interests of the people who are buying them."
Comparison shop. "Among those reputable companies, basically the most important thing is price," says Rothschild. "There is a huge variation for the exact same product across companies at any moment in time." Rothschild recommends visiting www.immediateannuity.com to get an idea of the average prices for people of your age and gender and the different prices for various types of annuities. You can also call up different life insurance companies that have good ratings for price quotes.
Watch for fees and add-ons. At their core, immediate annuities are a very simple product, but extra features come with additional costs. "Every time you put on a feature, you pay for that feature," says Elisse Walter, senior executive vice president of regulatory policy and programs at the NASD. So you need to look at all the fees and charges for additional features you add to the basic annuity. "There are a lot of different types of fees and expenses," Walter says. "And someone needs to break those down and make sure that they understand them."
Bequeath money outside of your annuity. If you plan to leave money to your children, you might be better off putting that money someplace other than your annuity. Some annuities offer guarantee periods, whereby if you happen to pass away in the first 10 years, for example, your heirs will get the payments you would have gotten in the first 10 years. "Avoid these products," advises Rothschild. "If you indeed have a bequest motive, it's a better deal in general to set the amount of money you want to give your children in one place and take a slightly smaller annuity."