What About Immediate Annuities In Today’s Market?

One of the primary reasons variable annuities are so popular is their perceived safety in a volatile market environment.  The so-called “guaranteed income” components of many variable annuity policies are appealing to risk-adverse investors, afraid of losing their life savings.  Unfortunately, rarely if ever are these guarantees worth the price you have to pay for them.  In practically all situations, investors wouledd be far better off with a conservative portfolio of stocks, bonds and real estate than a variable annuity with an income guarantee.

Immediate Annuities As A Bond Substitute

Immediate annuities (or fixed annuities), are another story entirely.  An immediate annuity is a contract between you and an insurance company essentially allowing you to buy a lifetime income stream.  You turn a lump sum over to an insurance company in exchange for monthly payments for as long as you live (or longer, depending on the specifics of your contract).  Sound familiar?  An immediate annuity is essentially a bond that expires when you do.

Since immediate annuities are somewhat similar to bonds, it can make sense to use them instead of bonds in certain circumstances due to a few unique characteristics.  For starters, since immediate annuities are an insurance product and only pay as long as you live, their yields are usually significantly higher than comparable bonds.  For instance, a 55 year old woman in Georgia would be eligible to receive $554 per month from a $100,000 purchase, according to immediateannuities.com, which equates to a 6.6% yield.  Try finding 6.6% on any safe bond in this market!  Additionally, immediate annuities can be bought with built-in inflation protection, for a price.  In exchange for accepting a lower initial monthly income, you can choose to receive annual inflation-indexed raises.

Who Should Look Into Immediate Annuities?

I will refrain from making blanket recommendations, because everybody’s situation is different.  But there are definitely some groups of people who immediate annuities might be good for and some groups for whom they definitely aren’t.  People fitting the following profile might want to give them a look.

• Retirees 55 and older – Retirees are the group most likely to value stability and least able to weather volatility.  Building a diversified, equity-based portfolio on top of a stable income large enough to meet your fixed expenses may be an ideal solution for many.  If the market does poorly, at least your basic needs are taken care of.  And if the market fares well, that’s just an added bonus.
• People with fixed, recurring expenses – Matching expenses with income is always the ideal.  If your expenses are stable, predictable, and unlikely to rise in the future, an immediate annuity may be for you.

Who Should Avoid Immediate Annuities?

Annuities aren’t for everybody.  If you fit the following profile, you should probably forget it.

• The young – Annuity payouts are based on life expectancy, so the younger you are, the lower your payout will be.  If you aren’t at least 55 years old, it’s not worth it.  In fact, I don’t even know if it’s possible to buy an annuity if you’re younger than 40 or so.
• Those with highly-variable expenses – If your monthly expenses aren’t relatively predictable, an immediate annuity probably isn’t for you since they don’t offer the growth opportunity necessary to give you an adequate safety cushion.