Immediate annuities are a great way to finance your retirement. Steve Vernon wrote an article for the California Institute of Finance that is part of a series helping people determine the best way to finance their retirement. As the final entry in the three part series, “Understanding how you can use immediate annuities to fund your retirement” offers examples for four different types of immediate annuities. Mr. Vernon used excellent charts to compare using fixed annuities, variable annuities, inflation-adjusted annuities and guaranteed lifetime withdrawal benefits (GLWB). To use an immediate annuity, you pay an insurance company a lump sum of money in order to receive monthly lifetime income payments from them during your retirement. The amount that you receive in your payments depends on multiple factors, including your age, sex, marital status, type of annuity and interest rates.
The three charts in Mr. Vernon’s article average the yearly income you will receive as a single male, as a single female, and as a married couple purchasing a joint and survivor annuity. He used figures from purchasing a $100,000 annuity and also offered the payout rates related to each type of annuity. There are also examples of payouts when purchasing your immediate annuity at age 62, age 65 or age 70. By far, the fixed and variable annuities offered the highest dollar amount and the highest payout rate. The older you are when purchasing the annuity, the better the payout rate of course. Men will receive more income than women and both single people receive more income than a married couple, which makes sense. For single men, the inflation-adjusted annuity offered more income than the GLWB at each age. For single women, the GLWB offered more income at ages 65 and 70, while it offered just a little bit less annual income than the inflation-adjusted annuity at age 62. The income for couples followed the same pattern as it did for the women with the last two types of annuities.
Between July of last year and January of this year, fixed annuity rates increased slightly. Inflation-adjusted annuity rates went down in the same time frame. Variable annuity and GLWB payout rates stayed the same. Mr. Vernon’s first two posts in the series evaluated systematic withdrawals and paying expenses with dividends and interest. Fixed and variable annuities offer higher payouts in retirement initially than the other two methods that were researched. Inflation-adjusted annuities warrant a comparison with the 4% drawdown method because they are similarly based. Payout rates for both singles at age 65 are significantly higher than the 4%, while they are 3.9% for couples. When using systematic withdrawals, you hope that your money will last as long as you live. But inflation-adjusted annuities guarantee income payments that you cannot outlive.
The major downside to buying an immediate annuity is that you give the control of your money to the insurance company from which you are buying your annuity. Many annuities do not leave money to your heirs when you die either. While GLWB annuities do not have these particular downsides, they do offer a lower payout rate and charge fees for the added benefits. It’s best to do an analysis of your personal situation to determine which annuity benefits offer you the most value and meet your needs. Systematic withdrawals and living off of dividends and interest don’t have the downside of annuities, but they also don’t have the guarantees. You could very easily outlive your money and not only will you have nothing left for your heirs, you could be struggling to pay your bills at an advanced age. A combination approach is mostly likely best for the majority of people. Evaluate your personal needs and goals. Use immediate annuities for their guarantee that you cannot outlive your monthly income and keep money elsewhere for liquidity and passing onto heirs.
Written by Rachel Summit