More Downsides to Income Annuities for Retirement
12 August 2006Continuing the thoughts of my previous post on buying annuities to guarantee an income in retirement, I just came across a CNN article here by Walter Updegrave on some of the potential issues you face when buying an annuity. He adds this cautionary note:
A couple of caveats. Annuity payments are based in part on your life expectancy. The younger you are, the lower the payment you’ll receive. So unless you really need that income now, you’re probably better off waiting to buy an income annuity. You can boost your lifetime monthly income by roughly 10%, for example, by buying at 65 rather than 60. That makes sense since a 65-year-old isn’t likely to live as long as a 60-year-old, so an insurer can afford to make a higher payment. Of course, you could play this game by putting off buying year after year after year, only to find you’ve gone through your money in the meantime. So the aim is to buy the annuity when you want to start getting the income.
The level of interest rates will also determine your payment. The higher rates are, the higher your payment. What this means is that buying an income annuity is, in effect, making a bet on interest rates. (This is less true for a variable income annuity since your returns depend on the performance of your subaccounts, but let’s not make things any more complicated than they already are.) If you buy when rates are high, you’re locking in a fat payment. Buy when rates are low, you’re locking in a skinny payment.
So if you’re younger, and think you can wait it out a few years, you might want to put off buying them to get the higher payouts, depending on what interest rates are like at the time. But there is one way to avoid this problem:
There’s nothing you can do to influence interest rates. But one strategy that does make sense for people who want to get lifetime income from an income annuity is to buy a few annuities over time. This way, you decrease the odds of buying when rates are at a bottom. Buying over time means that some of your annuity payments will be based on an older age, which, all else equal, should also result in higher payments overall.
Overall, it’s a good article you should read if you’re thinking about moving some of your money into annuities.
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