Financial Planning Blog

In Part 1 of this series, immediate or lifetime annuities were introduced as instruments for dealing with longevity risk (i.e. the risk of living long, and potentially out of money). In Part 2, additional background on immediate annuities was provided, along with thoughts on when and where they are a good fit in retirement income plans. To conclude the discussion, a number of additional considerations when purchasing immediate annuities are listed below.

• It pays to shop around for immediate annuities. There can be significant differences between the monthly payout from one insurance company to the next. To get a feel for competitive rates, check here, here, and here.
• Immediate annuities are a viable, safe way to secure a lifetime income, however they not without risk. An insurance company is guaranteeing the income stream, so the financial stability of the insurer is critical. (Links to insurer ratings can be found on the Resources-Recommended Websites page.) This is a major investment, so seriously consider enlisting the help of a competent, reputable professional.
• Although you want to make sure the insurer backing your annuity is financially secure, also be aware there are non-profit state guaranty associations, funded by life and health insurers, providing limited protection to holders of insurance policies and certain annuities. Check out the National Organization of Life and Health Insurance Guaranty Associations and the Idaho Life and Health Insurance Guaranty Association for more information. (In Idaho, annuity contracts currently are covered up to $250,000.)
• Even if you have decided that annuitizing your company pension is a good idea, you should shop around and see if you would be better off rolling the lump sum into an IRA, with the aim of purchasing immediate annuities from insurance companies providing better, potentially more secure payouts.
• Interest rates are the key variable in determining the prevailing market payout rates of immediate annuities. When interest rates are high, the annuity purchaser will receive a higher monthly income stream. When interest rates are low, as they are today, the payout is considerably lower. If possible, it may be wise to wait until interest rates rise again before purchasing an immediate annuity.
• Laddering annuities is a potential strategy for dealing with both interest rate risk and the default risk of insurers. By making purchases of multiple annuities over time, similar to a bond or CD ladder, you can take advantage of potentially rising interest rates. At the same time, by purchasing smaller annuities from different insurers, you diversify your risk of insurer default and keep annuity values under your state guaranty association limit.
• You don't need to annuitize your savings immediately upon retirement. In fact, some researchers contend you are better to wait until you are older before annuitizing. Waiting to annuitize your savings will increase your payout, since your future life expectancy is shorter every year.
• You don't need to annuitize all your savings--in fact, you don't want to. Once you buy an immediate annuity, you lose all flexibility with that money. Keeping money in reserve for unanticipated needs or opportunities is important.
• If you research immediate annuities, you may come across a related product called longevity insurance. Unlike an immediate annuity where payments to the annuitant start immediately, with longevity insurance payments are deferred several years into the future.
• Similar to pension plans, there are a number of payout options with immediate annuities. The trade-offs and choices can be difficult, and a clear understanding of your personal priorities and objectives is critical to making them.
• Most immediate annuities are not indexed for inflation. As a result, the purchasing power of the income stream will be eroded over time. This can be dealt with in a number of different ways, including the purchase of an annuity that adjusts at the inflation rate, or at a fixed rate per year. These features come at a price--i.e. a lower initial monthly payout.

Although immediate annuities are relatively simple products, the decision on if, when, and how, to include them in your retirement income plan is far from simple. It is important that you have thought through your personal priorities and objectives, and take your time making an informed decision. This is another area where a fee-only financial planner (i.e. one who is not selling financial products for a commission) can help you analyze your options and make the best choice for your unique situation.