Money Power: Annuities have pros and cons
BY SANDRA BLOCK Money Power
Saturday, October 06, 2012
10/06/12 at 4:52 AM
Seniors are often bombarded with pitches for annuities, and there's a reason for that: Annuities can be extremely profitable for the agent who sells them.
This is particularly true of variable and deferred annuities, which are often riddled with complex terms and high fees. Immediate annuities are more straightforward, but even they can be overhyped.
Consider these caveats:
- You give up control of your money. When you buy an immediate annuity, you hand over a lump sum to an insurance company in exchange for a monthly payment for the rest of your life (or in some instances, a specific period). For that reason, even the most outspoken supporters of immediate annuities advise against investing all - or even most - of your savings.
- Inflation could erode your payouts. Henry "Bud" Hebeler retired from Boeing Co. in 1989 with a pension that pays out the same amount every month. During the first 10 years of retirement, he says, his monthly payments lost 30 percent of their purchasing power.
If you expect to take payments for more than 10 years, Hebeler advises that you buy an annuity that's adjusted for inflation. Your initial payouts will be lower, but you'll protect yourself against a surge in prices.
- Low interest rates reduce your income. Insurers invest proceeds from annuity investors in the bond market. If interest rates - and insurance company earnings - are low when you buy an annuity (as they are now), the size of your promised payouts is stunted.
That doesn't mean you should put off buying an annuity, because interest rates could remain low for a long time. A better strategy is to invest your money gradually. Laddering your annuity purchases will allow you to lock in higher payments if rates rise.
- If the insurance company goes under, your money may be lost. A lifetime payout is only as good as the company behind it, so make sure you buy from an insurer rated at least A+ by A.M. Best. You can check out an insurer's rating at ambest.com.
Visit kiplinger.com for more tips on buying an immediate annuity.
Original Print Headline: Annuities have pros and cons
Sandra Block is a senior associate editor at Kiplinger's Personal Finance magazine. To send her a question or comment, go to tulsaworld.com/kiplingerfeedback.
