Are you retiring soon and looking into your options to start drawing down your savings from your employer-sponsored plan? Are you also concerned about making sure your money lasts as long as you need it to? If so, annuities may make sense for you.1 Annuities, simply put, reduce the risk that you will outlive your savings. Here is how to decide whether an annuity is right for you.
Annuities are contracts offered by insurance companies that pay a stream of monthly payments in exchange for a premium. An immediate annuity is one in which you receive payments right away. A deferred annuity is one where you purchase a contract, but don't receive payments until after a set period of time.
While annuities reduce the risk that you will outlive your savings (and suffer a drop in your standard of living), they do so at a cost. They are not liquid -- once you have purchased one, it can be expensive or impossible to change your mind later. For this reason, using a portion of your savings to purchase an annuity may be most attractive when:
• You (and your spouse) expect to live for many more years.
• You have relatively low income from other sources (e.g., from Social Security or defined benefit pension plans).
• You are relatively more averse to risk.
Which One Is Right for You?
Whether the amount of the annuity is right for you -- or even if you should annuitize -- involves a lot of issues, such as your other assets, savings, income, and taxes. If you're only taking care of yourself, the lifetime payment option might be a good choice. If there are other people counting on the income, you'll want to look into the other options.
Another issue for you to think about is today's low interest rates. One way to deal with this is to "ladder" smaller investments in immediate annuities over several years to take advantage of potentially higher interest rates.
Regardless of your decision, here are three key factors to keep in mind.
• Comparison shop. Payment rates will differ significantly from insurer to insurer. Look carefully at the fees and expenses. Examine the rates and terms they offer.
• Find a reputable company. Investigate the stability and financial strength of the companies you are thinking of purchasing an annuity from. Be sure to include the main insurance company rating agencies -- A.M. Best, Moody's, Fitch, Standard & Poor's, and Weiss -- as part of your due diligence process. And don't forget to ask your agent for a current listing of COMDEX scores for insurance carriers. COMDEX is a service that compiles scores from a range of ratings agencies and assigns a score to each company from 0 to 100 -- 100 being perfect.
• Watch for additional costs. At their core, immediate annuities are a very simple product, but extra features come with additional costs. Be sure to read the fine print.
1. Variable annuities are long-term, tax-deferred investment vehicles designed for retirement purposes and contain both an investment and insurance component. They are sold only by prospectus. Guarantees are based on the claims-paying ability of the issuer and do not apply to a variable annuity's separate account or its underlying investments. The investment returns and principal value of the available sub-account portfolios will fluctuate so that the value of an investor's unit, when redeemed, may be worth more or less than their original value. Withdrawals made prior to age 59½ may be subject to a 10% additional tax. Surrender charges may apply. Gains from tax-deferred investments are taxable as ordinary income upon withdrawal.
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Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail firstname.lastname@example.org.
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