Lots of retirement planning advisers are urging people to take some of their retirement money and buy an immediate annuity with it. An immediate annuity is very different from a deferred annuity, which is a way to save money, and has had a bad rap because the fees can be astronomical.
An immediate annuity works like this. You turn over a predetermined sum — say $100,000 — to an insurance company and it guarantees to pay you an income from it. Generally, you’ll get the same check every month the rest of your life, no matter what happens to interest rates and the economy. The downside is there are no refunds whether you die the day after you buy the annuity or if you live to be 110.
There is an upfront sales commission, about 2 percent, but after that — unlike with deferred annuities — there are no more fees. When you buy an annuity, you search for the greatest amount of monthly income from an insurer that you feel confident will be there for the long haul. Buying from a big insurance company that has been in business for a long time is a better bet than buying from a small newcomer even if they offer great rates.
You can buy single or joint life annuities usually with a spouse. You can choose an annuity that has inflation protection. And you can get both shorter-than-lifetime payout periods and longer-than-lifetime periods that guarantee that your heirs will get something, even if you die shortly after you buy the annuity. But you’ll pay for these bells and whistles — often handsomely.
For most people, a plain vanilla single or joint life annuity is the right way to go. If you’re considering one of these, a good place to start is with one of the free, mostly anonymous calculators. I think the best one is available through the mutual fund company Vanguard Group and Hueler Companies’ Income Solutions website (go through Vanguard if you’re a customer; otherwise, go direct to IncomeSolutions.com). The companies selling the annuities are listed directly along with their prices. No waiting around for a salesman to call you. But you do have to register and give some personal information.
If you just want a quick idea, try ImmediateAnnuities.com. You’ll get an average of what you can expect returns to be without any kind of registration or request for information. But you don’t know what company is selling the annuity.
Rates on immediate annuities are lower than they have been historically. For instance, as I write this, Mutual of Omaha is paying $543.28 per month — about $6,500 per year — for a $100,000 investment by a 64-year-old man and a 59-year-old woman. Not a huge sum, especially considering that it doesn’t increase with inflation.
If you’re optimistic that the economy is going to get better or pessimistic that inflation will be back soon, it might make sense to wait awhile before you buy.
For more information, check out Bankrate’s CDs & Investments calculators.