25Aug2011
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SOA Blog
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Retirement
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Annuities: Try one today

John Fenton writes about how annuities can provide guaranteed lifetime income.

by John Fenton, Director, Towers Watson

JohnFenton Much has been written about individuals’ worries about retirement–a recent SOA survey showed that 48 percent of respondents had no plans in place to protect against outliving their assets, and 37 percent are worried about running out of money during retirement. What should they do?

 

They should take a close look at buying an annuity that provides guaranteed lifetime income!  These annuities come primarily in two forms:  (1) fixed immediate annuity and (2) variable annuity with living benefits. Both offer annual/monthly payments that are guaranteed for life. The fixed immediate annuity is a great instrument for allocating a portion of an individual’s retirement portfolio.The concept is not necessarily to place all of your assets in an immediate annuity, but rather dedicate a portion of assets to fund ongoing basic living expenses (i.e. housing, food, transportation, etc). Payments vary by age and gender, but it’s not uncommon for annual payments to equal 7-9 percent of the amount contributed. Individuals may be better positioned to make this allocation a few years after they move into retirement, to give them a better understanding of their post-retirement income needs.

Variable annuities with living benefits take a different approach–they also provide guaranteed lifetime income, although guaranteed payments are not quite as high–generally 5 percent of amounts contributed. However there is upside potential through a variety of fund options. They also provide ongoing flexibility and access to monies.

Some people are concerned about fee levels on annuities. People are also concerned about unfavorable publicity they have received. Fee levels are higher on some annuities, but less so when one factors in that the cost of advice is embedded into the fees.  Fees take a different form on fixed immediate annuities; they are built directly into the rates you get. These embedded fees are relatively low, which help increase the payout rates.

Annuities are useful tools for individuals’ retirement portfolios–try one today!

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Discussion

4 responses to "Annuities: Try one today"

  • Elizabeth Curtiss says:

    I wish I had had this kind of information available when I purchased my annuity. I am well into retirement as they are a complicated part of a total retirement package.

  • Ken Klinger says:

    This is clearly a topic of great current interest. There was a relevant article in Smart Money just yesterday (September 13):

    http://www.smartmoney.com/retirement/planning/income-for-life-guaranteed-sort-of-1315006311618/

    A big concern for many people considering a payout annuity is the risk that future inflation will greatly erode the purchasing power of their monthly benefit. Just think back to the early 1980’s and imagine how that could impact someone on a fixed income.

  • Jeff Harper says:

    What do you mean by “…but it’s not common for annual payments to equal 7-9 percent of the amount contributed…”? What are typical assumed interest rates in SPIAs in these days of low fixed income interest rates?

  • John Fenton says:

    Thanks for picking up a what is a typo in here, should say “….not UNcommon…” pricing interest rates are tied to Treasury rate, at appropriate duration, with margin for credit spread. So, pricing rates are not real high these days, but can still give you annual pymts of 7%+ of premium.

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