Annuities are a big business. In 2019 $57.8billion in annuities were sold according to the Insured Retirement Institute.
What’s the appeal?
First, let’s remember that there are many kinds of annuities: Fixed, variable, immediate, and deferred are the main categories. There are about 1,000 permutations under those categories. Second, I don’t sell any kind of annuities, so this isn’t a pitch. Just a little info.
For this article I’m going to focus on using income annuities as part of your larger retirement plan. Income annuities are like life insurance in reverse. When you buy life insurance, you pay annual premiums to the insurance company. When you die, your beneficiaries get a lump sum. An income annuity is the opposite. You pay the insurance company a lump sum, and they send you money monthly for a set period or the rest of your life, depending on the policy.
Using part of your retirement savings to buy a monthly benefit that lasts your whole life may sound appealing, especially in times where your stock investments have seen a recent hit. For the safety, you are giving up potentially more long-term return. Sometimes a little safety goes a long way in making you feel better about your long term finances.
The way I like to see income annuities used is to cover any fixed expenses not otherwise paid for by Social Security or pensions. Similar to buying a little pension.
Here’s an example
Josiah’s mortgage, food, medical costs, insurance, and utilities add up to $2,000/month. He is 65 years old. Josiah’s Social Security benefit is $1,500/month. If he wanted to make sure his need-to-have expenses were covered by guaranteed income for his lifetime, he could buy a $500/month income annuity for about $105,000*.
Now, if Josiah’s total saved nest egg was $120,000, I wouldn’t recommend this. It is not enough flexibility in his retirement plan to only have $15,000 outside the annuity. However, if Josiah had at least $300,000 saved, using an income annuity might be a strategy to explore.
There are people who make a whole marketing campaign about the evil of annuities. True, they aren’t for everyone. But, an annuity product can have a place in the overall retirement plan. The trick is to not put all your eggs in the annuity basket.
*Calculated using the Fidelity.com income annuity estimator