Buying a single premium immediate annuity to help provide dependable income in retirement isn't a very popular retirement planning strategy. Even financial experts can be dubious about their value.
On the other hand, old-fashioned, defined benefit pensions are very popular. Many people wish they had one.
Buying a single premium immediate annuity isn't much different, except that you have to invest your own savings. There's the rub.
Wade Pfau, a well-respected financial researcher and professor of retirement income in the new doctoral program in financial and retirement planning at the American College in Philadelphia, recently analyzed the impact of single premium annuities on the safety of retirement portfolios. He concluded what many people think intuitively: You have to live to be very old for single premium annuities to be a good financial deal.
The concept of an annuity is simple. You turn over your money to an insurance company in return for a set monthly payment for the rest of your life. If you die soon after you buy the annuity, the insurer keeps the money that's left. If you live long enough to collect considerably more than you paid for the annuity, the insurance company loses because you get more -- maybe, considerable more -- than you paid in.
Pfau's research was critical of single premium annuities for a variety of complex reasons that boil down to this: If you invest wisely in stocks and bonds, odds are you will come out ahead -- possibly way ahead. But in his analysis, he also concluded that there can be a place in retirement planning for single premium annuities for these reasons:
- Your grandmother lived to 103. Single premium annuities provide "unparalleled longevity protection ... as long as you live well past life expectancy," Pfau says.
- A single premium annuity can be less risky than a fixed stock allocation. If you're not willing or able to balance your investments and you are not comfortable turning the job over to somebody else, then an annuity may be the answer.
A sense of security is worth money. If the thought of depending only on the income from stocks and bonds -- especially if it means putting more money into stocks as you age -- makes you really nervous, buying an inflation-adjusted single premium annuity can help you avoid heartburn.
The bottom line: In the end, you have to decide for yourself whether the dependable income that results from buying an annuity is worth the cost. If it makes you feel good, do it.