Immediate Annuities Pros And Cons

Variable annuities have been quite the glamorous investment lately, what with their misleading “guaranteed minimum returns” and whatnot.  But an older, more traditional form of annuity, the immediate annuity, is by far the better deal for most investors.

Immediate Annuities Pros And Cons

Simply put, an immediate annuity is an insurance contract between you and an insurance company promising you a pre-determined guaranteed monthly income for some pre-determined period of time, often but not always for the rest of your life.  Hence, they are most appropriate for somebody with fixed expenses, such as retirees.

Pros

• Guaranteed Income For Life – No list of fixed annuities pros and cons would be complete without this.  The prospect of guaranteed income no matter what goes on in the market is appealing, to say the least.
• You Know Your Annual Rate Of Return Upfront – Before you ever sign the contract, you’ll know exactly how much money you’ll have to front to generate what monthly payment given a variety of scenarios.  Contrast this with stocks and bonds, where you’ll have no idea what your future return is going to be until you sell it.
• State Government Guarantees (To  A Point) – Most states have FDIC-lick insurance commissions with the task of regulating and guaranteeing annuity payouts.  Like FDIC insurance, there are limits and the protections vary from state to state, so be sure you know the rules in your state before buying.
• Flexibility - You can purchase a rider for pretty much any scenario you can think of.  Need inflation protection?  No problem, you can get a quote for that.  Need a spousal survival rider?  You can get a quote for that too.
• Easiest Investment On Earth – Immediate annuities couldn’t be simpler to understand:  you pay a lump sum and receive an income stream.  There’s something to be said for simplicity.

Cons

• Inflation Protection Will Cost You – By default, most fixed annuities don’t adjust for inflation over the years.  Nobody knows what inflation will be going forward, but one thing is for sure:  $2,000 per month 15 years from now is going to be worth a lot less than $2,000 per month today.  If you want a yearly inflation adjustment, you’ll have to pay for it.
• Yields For Younger Investors Are Minuscule – Since annuity payouts are determined mostly by life expectancy, the younger you are, the lower your payout.  Investors older than 65 or so can buy a great return, but investors much younger than that are potentially looking at sub-Treasury yields (if they can find a company to underwrite a policy for them at all).  Thus, if you’re not already retired, an annuity probably isn’t for you.
• You Still Have Credit Risk - Sure, there are state government guarantees, but most of them are far too low to protect your investment completely.  If you have a sizable nest egg, you’ll probably need to split your money amongst at least 2 or 3 different insurers to be completely safe.

Curious how much monthly income your nest egg could generate for you?  You can get quotes from, not surprisingly, immediateannuities.com.  Just enter your age, state, and gender and click go.  I wouldn’t recommend actually buying a policy through them, but it can help give you a general idea of how much income you can wring from your portfolio relative to other investment strategies.