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I have been reading a lot about immediate annuities lately and I really have to address this question, are immediate annuities any good now a days? I will say this, they have their place. They are not what I would call the best vehicle for many people. These instruments have there place in a portfolio, but why would you want one in today’s world?An immediate annuity is great for people who want income for a specified number of years or for the rest of their life. The problem with an immediate annuity is the income is fixed, forever. There is absolutely no chance to keep up with inflation. These types of investments may make sense for a potion of your portfolio, but not a big portion.
I read yesterday that some experts say 25 to 50% of your retirement savings should be invested in an immediate annuity. Are you crazy? Why in the world would you invest half of your nest egg in an investment that guarantees that you will not keep up with inflation? You wouldn’t and you shouldn’t. I would say no more than 10 to 15% should ever go into an immediate annuity.
Some immediate annuities have inflation riders on them were your income will go up by 3 to 5% a year. I used to think this was a great feature, and it is if you buy one, but when you add up the amount of premium it takes to make this option work it does not make sense. It takes a larger amount of money in an immediate annuity with the inflation rider on it to generate decent income in the first few years, as compared to a regular immediate annuity.
The other drawback is in today’s interest rate environment. You are buying a vehicle, which will never change, at very low interest rates. I will not get into speculation over where interest rates will go in the future, but it is safe to say that 30 year lows and an immediate annuities equals a problem in the future for you. The inflation rider is very interesting, but like I said it will take a lot more money to generate decent income in the first few years.
I compare this to a variable annuity with a For-Life benefit and the variable annuity looks far better. For starters the income will be pretty darn close to an immediate annuity, a For-Life benefit usually allows you to withdrawal up to 5% from your initial investment for the rest of your life. Fees are not a concern, or should not be a concern for you, mainly because if you are willing to hand over your investment for an immediate annuity then what does it matter?
With the For-Life benefit you have the ability to keep up with inflation. Usually the benefit has some kind of step-up in the benefit. This means that if you experience positive market growth then your benefit can increase with your investments. The typical step-up will range between 1 to 5 years, depending on the company. Your money can be invested into stocks, bonds or the fixed account (if offered) to address your risk tolerance concerns.
The investment will fluctuate with the market, but as long as your income is stable what is the difference? The whole point is this; if you are giving your money away to an insurance company to pay you out a little bit of interest and basically your money back then what are you worried about risk for? As long as it is meeting your income needs, the income never goes down, but has upside potential it will do the same thing as an immediate annuity will do for you.
With the variable annuity For-Life benefit you have many advantages. You have: upside potential, steady income, the potential to have that income increase, you do not lose control over your money and you may have a death benefit for your heirs. With an immediate annuity you have none of those features, when you die (unless you choose a period certain) typically your money is left to the insurance company.
I am not saying a variable annuity is right for everyone, but as long as your income is stable it should not matter. With the variable annuity For-Life benefit the income is guaranteed for your lifetime, just like most immediate annuities. Consult a qualified investment representative t find out if a variable annuity is right for you or not.
You can beat up on variable annuities all you want but I dare you to compare an immediate annuity to a For-Life variable annuity any day. The benefits to not losing control of your money, upside potential and life time income beats a fixed payment for as long as you live any day.
By: Scott Demonte
I read yesterday that some experts say 25 to 50% of your retirement savings should be invested in an immediate annuity. Are you crazy? Why in the world would you invest half of your nest egg in an investment that guarantees that you will not keep up with inflation? You wouldn’t and you shouldn’t. I would say no more than 10 to 15% should ever go into an immediate annuity.
Some immediate annuities have inflation riders on them were your income will go up by 3 to 5% a year. I used to think this was a great feature, and it is if you buy one, but when you add up the amount of premium it takes to make this option work it does not make sense. It takes a larger amount of money in an immediate annuity with the inflation rider on it to generate decent income in the first few years, as compared to a regular immediate annuity.
The other drawback is in today’s interest rate environment. You are buying a vehicle, which will never change, at very low interest rates. I will not get into speculation over where interest rates will go in the future, but it is safe to say that 30 year lows and an immediate annuities equals a problem in the future for you. The inflation rider is very interesting, but like I said it will take a lot more money to generate decent income in the first few years.
I compare this to a variable annuity with a For-Life benefit and the variable annuity looks far better. For starters the income will be pretty darn close to an immediate annuity, a For-Life benefit usually allows you to withdrawal up to 5% from your initial investment for the rest of your life. Fees are not a concern, or should not be a concern for you, mainly because if you are willing to hand over your investment for an immediate annuity then what does it matter?
With the For-Life benefit you have the ability to keep up with inflation. Usually the benefit has some kind of step-up in the benefit. This means that if you experience positive market growth then your benefit can increase with your investments. The typical step-up will range between 1 to 5 years, depending on the company. Your money can be invested into stocks, bonds or the fixed account (if offered) to address your risk tolerance concerns.
The investment will fluctuate with the market, but as long as your income is stable what is the difference? The whole point is this; if you are giving your money away to an insurance company to pay you out a little bit of interest and basically your money back then what are you worried about risk for? As long as it is meeting your income needs, the income never goes down, but has upside potential it will do the same thing as an immediate annuity will do for you.
With the variable annuity For-Life benefit you have many advantages. You have: upside potential, steady income, the potential to have that income increase, you do not lose control over your money and you may have a death benefit for your heirs. With an immediate annuity you have none of those features, when you die (unless you choose a period certain) typically your money is left to the insurance company.
I am not saying a variable annuity is right for everyone, but as long as your income is stable it should not matter. With the variable annuity For-Life benefit the income is guaranteed for your lifetime, just like most immediate annuities. Consult a qualified investment representative t find out if a variable annuity is right for you or not.
You can beat up on variable annuities all you want but I dare you to compare an immediate annuity to a For-Life variable annuity any day. The benefits to not losing control of your money, upside potential and life time income beats a fixed payment for as long as you live any day.
By: Scott Demonte