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How to shop for an annuity

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As old-fashioned defined-benefit pensions increasingly become a thing of the past, insurance companies are developing private annuities that people planning for retirement without the security of a pension might find appealing.

New York Life surveyed potential clients and asked them to rank the attributes they most sought in a retirement product. Here’s how they prioritized their wishes:

  • 76 percent want control of their money.
  • 73 want their principal to remain safe.
  • 72 percent want an investment that keeps pace with inflation.
  • 67 percent want easy access to their money.
  • 55 percent want income payments they can’t outlive.

The product these standards suggest sounds too good to be true, but companies like New York Life are trying to make it happen. It recently introduced a fixed-income product called Clear Income Fixed Annuity that responds to this research.

A growing market

New York Life’s effort isn’t unique; other companies also are debuting new products to woo customers dissatisfied with older options. The result is a broad range of new variations on the annuity theme that are worth exploring, especially if you’ll otherwise be mostly dependent on withdrawals from savings for a steady income during retirement.

“There has been a significant amount of innovation and R&D with insurance companies sharpening their pencils in order to offer a vehicle that gives clients a guaranteed income stream at higher levels than they have received in the past,” says Jason Konopik, actuary and chief financial officer for AMZ Financial, a company that develops indexed annuity products sold by a variety of insurance companies and brokers.

Compared to plain vanilla immediate annuities that offer an unchanging guaranteed income, the new offerings are very hard for most people to fully understand. “There has been a lot of complexity brought to the table as companies have focused on what it takes to make these products look sexy,” Konopik says.

Know the bottom line

If you are thinking of buying one of these Swiss Army-knife-type annuities, Konopik advises you not to get lost in the extraneous details. The bottom line is the place to start: Figure out what the guaranteed income stream is for the amount of money you have to spend and when that income will start. After that, factor in the bells and whistles, but don’t base your decision strictly on them. These add-ons are just gravy, Konopik says.

To get started, figure out what you’d like to spend on the annuity, then ask insurers to show you various products and run your numbers for each one. If you’ll need the benefits very soon, look at single premium annuities or fixed indexed annuities. If you are going to retire in five to 10 years, consider a deferred-income annuity. “Put all the contenders side by side and may the best man win,” Konopik says.

Living with multiple annuities

He believes that layering assets may make sense for many people. For instance, earmark enough money to pay off your mortgage at age 66, then purchase a five-year period-certain immediate annuity to provide enough money to live on from age 67 to 70.

Then after you take Social Security at age 70 when it hits its maximum value, switch to another, smaller annuity to make up the difference between Social Security and what you now need to live on. Finally, consider another annuity that kicks in at 80 or 85, when inflation may have eroded your previous income.

“Buy the best product you can find for each purpose from different carriers and layer the assets for the best results,” Konopik suggests.

Old-fashioned pensions were designed to deal with a retirement that was short. Today, 30 work-free years is becoming the norm. These new options aren’t cheap, nor are they simple to buy, but they may work better for today’s retiree.

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