Why Retirees Avoid Immediate Annuities
By Hersh Stern - Revised Friday, December 6, 2019
Immediate Annuities are attractive products if you are seeking a guaranteed income. In exchange for a single premium, you receive a monthly income based on the amount you spent. Generally the amount you receive each month remains level, but you can also buy a policy which adjusts upwards for inflation. Basically, an immediate annuity works like a pension, and everyone likes the security of a pension.
Upfront this sounds like a great way to go. The challenge is that the fear of the unknown often scares off retirees in need of guaranteed income, because they worry about the “what if’s”. For example, a concern frequently mentioned by retirees is the fear of dying before they receive back their full premium. Stated simply, they don’t want their hard earned money left to the insurance company. Many retirees don't realize, however, that this risk is only inherent in a Life Only immediate annuity and can be easily mitigated. You can readily protect yourself against this risk by adding a refund or beneficiary option to the annuity. In that way, even if you died within the first year, the remaining unearned premium would be paid back by the insurance company to your beneficiaries.
Owning an immediate annuity is a good way to ensure that you will never run out of money. But if you don't have an adequate emergency fund after buying the annuity, then an unexpected major expense could create a financial crisis for you. This is another concern which stops retirees from buying immediate annuities. Recently, new research by Felix Reichling of the Congressional Budget Office and Kent Smetters of the Wharton School of Business found that the fear of rising healthcare costs and the uncertainty of long term care options , keeps many retirees from buying immediate annuities. However, as Michael Kitces, director of research at Pinnacle Advisory Group, suggests, if you have an adequate side fund, an immediate annuity which provides guaranteed income, can really pay off, especially if you live beyond your life expectancy.
Once healthcare needs have been addressed, considering an immediate income annuity, with enough invested to cover monthly fixed expenses, can be a good option. Kitces reminds us that with a dependable, steady income from your annuity, you'll be better able to hang on to stocks, which can give you higher returns. Having a mix of different income options is the best way to prepare for the unknown future.