Dear Dr. Don,
I've enjoyed your advice -- definitely a cut above the normal "cookie cutter" advice. In particular, I was interested in your analysis of converting to a Roth IRA. I never understood the current mindless advice that everyone should convert -- especially after years of being told we should defer taxes to retirement years (as much as possible). Now, I have a question about the timing of buying an immediate fixed annuity.
Do prevailing low interest rates make this product more expensive? Please just assume this is what I'm purchasing and that I am not open to any other type of annuity.
-- Bill Banker
Thanks for the kind words about the column. An immediate annuity is a product of its times, meaning that low market interest rates will hold down the return on the annuity.
A way to avoid making such a large bet on interest rates is to dollar average in on the investment, meaning you buy several annuities over time instead of one annuity today. Like a laddered CD or bond portfolio, you can have a laddered annuity portfolio. The difference is that with the laddered annuity portfolio, you buy in over time.
With an immediate annuity, you pay a lump sum today to receive an income stream for life. There are different options you can bundle into the annuity, such as basing it on the joint lives of two annuitants. You can have an inflation-indexed annuity, but that option is very expensive. You can structure the annuity so your named beneficiary is guaranteed to get back all the money you spent on purchasing the annuity. Alternately, you can guarantee that either you or your beneficiary will receive payments for at least five, 10, 15 or 20 years.
Before purchasing an immediate annuity, you might want to get a second opinion on the decision from a fee-only financial planner.
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