Immediate Fixed Annuities Can Bring Immediate Relief
Lee Rosenberg, CFP | May 18th, 2009Guaranteed income for life sounds like one of those grand prize for a contest that one person wins and everyone else dreams about. But there is an investment that offers such a thing, and under the right circumstances, it can be a winning strategy. It’s called an immediate fixed annuity, or income annuity, and it works like this: buy a one-time premium from an insurance company, and in return, get a guaranteed monthly income for the rest of your life.
The actual payout depends on three things: the lump sum invested, the age of the recipient and interest rates at the time you buy. Generally, the older the investor, the higher the payout (means fewer years that the company has to provide income).
In light of the shaky economic conditions affecting 401ks and other retirement income sources, older investors are flocking (in the last quarter of 2008, sales were up by 23%) as a way to insure a steady income stream. Here’s an example of how it would work:
A 65-year old man invests $100,000 with an insurance company and receives $675/month for life. His older brother, age 70, invests the same $100,000 and receives $748/month. If they buy in with a 15-year guarantee but die within that time, a monthly income is paid out to beneficiaries for the remainder of the 15 years (rule of thumb is 80% to 90% of the owner’s income).
As with any investment, there are possible downsides. Because the amount paid out is based in part on prevailing interest rates, if you buy in at today’s lower rates, it means lower monthly income and less opportunity to jump in to the market if the recovery starts. Another issue could be concern about inflation diminishing the value of the income. In that case, look for an inflation-adjusted annuity. The payments start out smaller, and then increase annually.
Before you buy:
* Stick with the A- rated insurance companies to allay fears of the company not having the financial strength to guarantee the payment stream. Check with Moody’s, Standard & Poors, Fitch and A.M. Best for ratings
* Shop around for quotes and consider buying from several different companies to spread the risk.
* Consider your spouse and heirs BEFORE you buy. This is an irrevocable purchase. If you don’t start out with a survivor’s benefit, you can’t change your mind later. Adding a beneficiary doesn’t greatly reduce your monthly income.
For today’s retirement income investor, the best way to create an income stream is to layer these annuities, your social security, and your bond and dividend interest income to create as predictable a cash flow as possible. Now that’s a winning strategy.
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Tags: 401k, annuities, financial planning, fixed annuity, immediate fixed annuity, income for life, investing, lee rosenberg
About the Author: Lee Rosenberg is the Co-founder of ARS Financial Services, Inc. As a Certified Financial Planner with more than 34 years of solid financial expertise. Lee is a registered representative of Cadaret, Grant & Co., Inc. He was also named one of the top 25 Independent Financial Advisers in the US by Rep magazine.
