Dear Savvy Senior
I’m interested in learning more about the kind of annuity that provides a safe steady income for life. At age 70 and recently retired, I would like to shore up my retirement income, and rely less on the unpredictable stock market. What can you tell me? —Annuity Seeking Ann
The kind of annuity you’re asking about is a "fixed immediate annuity," which is a risk-free retirement tool that’s become very popular among retirees in these financially uncertain times. Here’s what you should know.
A fixed immediate annuity, also known as an income annuity, is like a do-it-yourself pension that can provide you with a guaranteed stream of income for as long as you live. How it works is you pay an insurance company a lump-sum payment, and the insurance company provides you with a guaranteed monthly check (immediately) for the rest of your life or for a specific period of time, whatever you choose. But the bad news is that with most immediate annuities, once you hand over your payment to the insurance company, you’re locked into the payment agreement and you lose access to your money.
The amount of monthly income you’ll receive from an immediate annuity will depend on your age (the older you are the more you’ll get), gender (women receive slightly less because they tend to live longer), the size of your investment, long-term interest rates and any special features you choose. For example, in exchange for a $100,000 lump-sum payment, a 70-year-old woman could get around $700 every month for the rest of her life.
Immediate annuities also come with a variety payout options to meet your specific needs and lifestyle. Your choices include the:
Single-life annuity: This is the most basic option that provides fixed monthly payments for the rest of your life, but payments stop when you die, whether it’s tomorrow or 50 years later. Or, if this seems too risky, you can opt for a single-life annuity rider that provides payouts or refunds to your heirs if you die early. These security options, however, will lower your monthly payout.
Joint-life annuity: Generally purchased by married couples, this type of annuity makes payments as long as one spouse is alive. In some cases this option will pay less money after the death of one spouse. And because two lives are covered instead of one (which makes life expectancy higher), the monthly payment is smaller than a single-life annuity.
Fixed-period annuity: This option pays income for a specific length of time, usually ranging between 5 and 30 years. If you die early before your fixed period expires, your beneficiary will receive your payments until the term expires.
In addition to these basic payout options, many insurance companies may offer a variety of other features to entice you, but keep in mind that more features usually means a lower payout.
Another concern with fixed annuities is inflation, which erodes the value of your payment over time. To protect against this you can get an annuity with an inflation-adjusted rider which offers a smaller payout initially but increases each year.
Or, another way to fight inflation is to "ladder" annuities by buying additional fixed-rate annuities every few years. This allows you to capture higher payments as you age, and the interest rates, which are low right now, may rise in future years also giving you a higher payout.
Shopping and Investing
To get personalized annuity quotes visit www.immediateannuities.com. Also be sure the insurance companies you’re considering have high financial strength ratings. Look for a rating of A+ or better by A.M. Best at www.ambest.com or call 908-439-2200. And as far as how much to invest, most experts recommend investing only a portion (25 to 50 percent) of your retirement savings in an immediate annuity, or just enough to help cover your monthly expenses.
Savvy Tip: If you buy an immediate annuity with an insurance company that goes out of business, you can count on some protection (usually between $100,000 and $300,000 worth of coverage) from your state guaranty association. See www.nolhga.com and click on "State Associations" to learn more.