Are Annuities Right for You?
There are two types of annuities: immediate annuities and deferred annuities. Immediate annuities are best for retirees who want to receive payouts right away. Deferred annuities are better for people who are still saving for a future retirement. The money they invest grows tax-deferred until it is withdrawn later.
If you invest money in an immediate annuity, an insurance company guarantees that you will receive a fixed payment every month for as long as you live (or as long as you or a beneficiary are alive). But, in most cases, your money is locked up after you hand it over to the insurance company. So you don't want to tie up all of your money in an annuity.
The annuity concept dates back to early Rome, when citizens would make a lump-sum payment to a contract called an annual in exchange for income payments received once a year for the rest of their lives.
More than 4% of his initial investment each year
Even in today’s low-rate environment, a 65-year-old man can buy an annuity that pays more than 6% of his initial investment annually for the rest of his life. That's because your payouts are both from earnings and a return of your principal, and you pool your risk with other policyholders. You'll receive the highest payout with an annuity that stops paying when you die.
In general, annual immediate annuity payments are higher for men because men usually have a shorter life expectancy. Now a 65-year-old man who invests $100,000 in an immediate annuity can receive about $6,500 per year, while a 65-year-old woman could receive about $6,100 per year.
The older you are when you buy the annuity, the higher your annual payout because your life expectancy is shorter. Currently, a 65-year-old man who invests $100,000 in an immediate annuity can receive about $6,500 per year, while a 75-year-old man can receive about $9,100 per year. For this reason, some people ladder their annuities -- investing some money early in retirement to cover expenses, then adding more when they get older to boost payouts.
Standard immediate annuities guarantee that you’ll receive an annual fixed payout that will never decrease for the rest of your life. Some companies offer cost-of-living adjustments that boost the payouts to keep up with inflation. The trade-off is a smaller initial annual payout. But the inflation-adjusted annuity can be a better deal in the long run if you survive beyond your life expectancy.
Although deferred annuities let you cash out at any time, you may not get all your money back. You generally have to pay a surrender charge that starts at about 7% to 10% of the account balance in the first year, and gradually decreases every year until it disappears after seven to ten years. Also, if you take the money before age 59½, you generally have to pay an early-withdrawal penalty of 10%.
Most deferred annuities allow you to invest your money in mutual-fund-like sub-accounts. Many of these products, known as deferred variable annuities, allow you to add, for an extra fee, guarantees that you won’t lose money even if the underlying investments decline in value. If the market tanks, you can still withdraw about 5% of the guaranteed balance each year. And you can withdraw the actual account value at any time (after the surrender period expires) if your investments increase in value.
It depends on the type of annuity you buy.
If you have a variable deferred annuity, your investments are held in separate accounts and won’t be affected if the insurer goes bankrupt. If you have a fixed deferred annuity or are receiving fixed immediate annuity payouts, then your payouts are protected by the state guaranty association. The level of protection varies by state. Find your state limits at www.nolhga.com.