Making Cents: Annuities Fill 401(k), Social Security Hole
After seeing many a 401(k) turn into a “half K,” investors and retirees are now thinking about how to provide a dependable income stream for the rest of their lives. Besides the elusive pension, income for life can be found in Social Security or immediate annuities.
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Despite its fiscal woes, spokespeople for the Social Security Administration seem to feel that the government will do something to meet its obligations. Admittedly, I have no clue how the federal government is going to do it, but some combination of reduced benefits, taxation on benefits or delaying the payment of benefits is likely.
This uncertainty has prompted many to take the situation into their own hands. The result has been a huge increase in the sale of immediate fixed annuities. This is good for insurers, as they are then guaranteed to have control over your money for the rest of your life, but it can also be very good for you.
An immediate annuity involves exchanging a lump sum of cash for a future income stream. The income stream can be for a fixed period such as 10 years or as long as the joint life expectancy of you and your spouse.
One downside of an immediate annuity is the loss of control over your money. Perhaps another downside is the loss of purchasing power due to inflation; the insurers, however, have an answer for that in their inflation-adjusted immediate annuities.
Another concern for retirees is feeling they are betting against themselves. Besides locking in a minimum time period for payments, retirees fear dying prematurely and having those income payments stop, with the balance of their account becoming the irrevocable property of the insurer.
We had heard about annuities and were investigating them for our IRAs. We also heard bad things about pushy brokers over the years. So when we went to the ImmediateAnnuities.com site we were skeptical about calling them. But whenever we called their staff was really friendly. They answered all our questions and one of their reps even told us that at our ages there was no advantage to buying the annuity with our IRAs. These guys are really honest!
Some, however, see the other side of that coin. If you outlive the insurance company's estimate of your life expectancy, the payments keep on coming. With advanced medical technology and retirees hitting the gym every day, there is a real possibility that you will exceed the current mortality estimates used by insurers.
I wouldn't recommend putting all money into an immediate annuity. The best use for these products is to cover the base living expenses, and then to use other savings for inflation protection and lifestyle supplements. Make sure to work with an adviser who will shop around for you, because the amount of income that you receive from company to company may vary substantially.