Savvy Senior

Fixed Immediate Annuities
Dear Savvy Senior,
My wife and I are both in our 60’s and are looking into some different investment options to help fund our retirement. Our neighbor recently suggested we purchase an annuity, but with all the terms and features they offer, I’m having a hard time understanding it. Can you provide me some information on this, and is an annuity a good option for us?
Annuity Dazed

Dear Dazed,
If you’re worried that you’ll outlive your money, or if you don’t have enough guaranteed income from Social Security or other pensions to cover you basic needs, or if you don’t have the stomach for the stock market, a fixed immediate annuity (not a variable or deferred annuity) is an option you should consider. Here’s what you should know.

Personal Pension
A fixed immediate annuity is like a do-it-yourself pension that can provide you and your wife with a guaranteed stream of income for as long as you live. How it works is you pay an insurance company a lump-sum payment, and the insurance company provides you with a guaranteed monthly check (immediately) for the rest of your life or for a specific period of time, whatever you choose.

But the bad news is that with most immediate annuities, once you hand over your payment to the insurance company, you’re locked into the payment agreement and you lose access to your money.

Immediate Income
The amount of monthly income you’ll receive from an immediate annuity will depend on your age (the older you are the more you’ll get), gender (women receive slightly less because they tend to live longer), the size of your lump-sum payment, long-term interest rates and any special features you choose.

For example, in exchange for a $100,000 lump-sum payment, a 65-year-old male would get about $650 a month (for the rest of his life) or $7,800 a year for a single life annuity. That means he would have to live about 13 years to recoup his initial investment without interest.

Annuity Options
Immediate annuities offer lots of different add-on features that can make them extremely confusing and can also drive up the annuity’s cost or lower the payout. Some different options you’ll need to consider are:

•Single life: Also known as “straight life” or “life only,” this is the most basic immediate annuity that provides the largest amount of income. This option provides fixed monthly payments to the annuity owner for the rest of his or her life, but payments stop when you die, whether it’s tomorrow or 50 years later.

•Joint and survivor: Generally purchased by married couples, this type of annuity makes payments as long as one of the annuity owners is alive. Annuity owners can choose a reduced payment for the surviving spouse, which increases the payments while both are alive.

•Period Certain: Also called a “fixed period” annuity, this pays income for a specific length of time, ranging from 5 to 25 years. If the annuity owner dies during the period, a beneficiary will receive payments until the term expires. This option can increase the annuity’s cost.

•Cost-of-living rider: If you’re concerned that inflation will erode the value of your annuity payment over time, you can choose an annuity that offers a cost-of-living adjustment. However, this option will lower your payout at first but can pay off if you live long enough.

Annuity Shopping
The best resource to shop and compare immediate annuities is at www.immediateannuity.com.