Immediate Annuities Stretch Retirement

CBS Moneywatch’s Steve Vernon highlights the importance of using immediate annuities along with 401k’s and IRA’s in retirement.  His article, “IRAs and 401ks: Maximize Retirement Income with Immediate Annuties,” recommends using immediate annuities in retirement planning especially for those who don’t have significant or any pension plan.  An immediate fixed annuity will give you payments similar to receiving a paycheck for the rest of your life.  The two main risks that you’ll be protected against are investment risk and longevity risk.  With a fixed annuity you don’t have to worry about your investment losing value or worry about outliving your money.

Immediate annuities do not protect against the risk of inflation, so that is why the author and other experts advise splitting your savings into multiple investments.  Your monthly income payments will not change with an immediate fixed annuity, but they could with a variable annuity.  While a life annuity pays money out until you die, a death benefit annuity will continue your payments to a spouse or other beneficiary after you die.  The main disadvantages of an immediate annuity are that you can’t get your money back if you change your mind about the purchase and no money will be left to heirs once you and your beneficiary are no longer living.

For those disadvantages though, you get an excellent advantage.  Compared to the other investments, immediate annuities tend to give you the highest retirement income.  Many advisors recommend splitting your money between two of the three investments listed in this article to balance the advantages with the disadvantages.  When you compare annuities to other investments your initial investment is high, the potential for growth and the protection against investment risk depend on whether it is a fixed or variable annuity, you don’t have access to or preservation of your principal.  You are protected against longevity risk, there is a moderate level of work to set up but not much ongoing maintenance, and you are not able to switch to a different investment.  See if an annuity is right for your future.

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