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Three Different Immediate Annuity Strategies

An article recently published by Marketwatch gives Manish Malhotra’s strategies for investing in immediate annuities.  In “Get payments for life with these three strategies,” Malhotra says that when using an immediate annuity in your retirement planning you can “build the base,” “build brick-by-brick,” or use them “as last resort.”  Immediate annuities pay out monthly payments after buying them with a one time lump sum payout.  In rare circumstances, payments occur at a different rate than monthly, but that is the norm.  Sometimes the payments are fixed, while other times they are adjusted for inflation, typically based on the Consumer Price Index for All Urban Consumers (CPI-U).

With his build the base strategy, he suggests using immediate annuities to cover the basic living expenses left after you have used your other inflation-adjusted income.  Social Security is one example of such income, while some pensions also adjust for inflation.  For example, if you will have $60,000 per year of basic expenses for food, mortgage, health insurance and the rest, but your other inflation-adjusted income will total $42,000, you should purchase an immediate annuity to pay you out $18,000 yearly.  This is a great strategy for many investors, but Malhotra points out that some people get nervous investing a large chunk of their savings and worry that their money will be lost if they die sooner than they thought.  Buying a period certain annuity that will pay heirs for 20 years or so and adding death benefits are two ways to combat this worry, but keep in mind that payments will be smaller.

The build brick-by-brick strategy is his next option for immediate annuities, something you often hear referred to as laddering.  With this strategy, you don’t have to worry about having an annuity adjusted for inflation because you are buying multiple smaller annuities over a period of time.  Each time you buy a new immediate annuity, you will have an interest rate and payment schedule adjusted for the current market conditions.  There are other benefits to building your annuity purchases over time.  Your money is available in case of an emergency for easier access.  You can also adjust a joint annuity in the case that one of the spouses develops an illness lowering their life expectancy.  And there is the mental aspect where you don’t have to worry about losing everything if you die right away and haven’t opted for any type of death benefits or certain periods.

His final strategy is using an annuity as a last resort, rather than planning ahead with one.  I’m not so sure about this as a strategy, but I guess it is more for people that didn’t plan well and just hoped for the best.  Those using a draw down income strategy often find themselves nearing a point where they run out of money.  Then they tend to panic and buy an immediate annuity without researching enough and making sure they are buying at a good time in the markets and in their retirement planning phase.  The bottom line is that it’s better to plan ahead, especially because your cognitive function lessens as you age.  Annuities are best used in a strategic retirement plan and immediate annuities are good for many retirees.

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