Question: I am 64 years old and have recently retired. I plan to defer taking Social Security as long as possible as I currently do not need the money and have a diversified portfolio. My question has to do with purchasing a vehicle called an "immediate annuity". It is my understanding that these are sold by insurance companies and that if one pays an upfront premium to the insurance company it will pay a monthly dividend for the rest of my life. Since I do not know (1) how long I will live, nor (2) how my investments will fare over the long term, my question is whether it would be wise to pay several hundred thousand dollars in order to have a guaranteed monthly income for the next several decades (I am optimistic about my health)? This income would cover my basic monthly needs such as mortgage and food. I recognize that this money is nonrefundable once paid, and that the monthly payout is not adjusted for inflation. I would not make this my entire retirement strategy but would this make sense as part of an overall plan? Terry, Bethlehem, PA
Answer: Immediate annuities are worth exploring. I like the way you're thinking about it. You buy a measure of financial safety and financial comfort with an immediate annuity. You get a predictable monthly income (or quarterly or annual depending on the chosen payout option) on the investment for the rest of your life. You can't outlive it.
However, there are a number of factors to consider. You should only do business with a highly rated insurance company, or an immediate annuity sold through a well-known mutual fund company.
You want to work with a company with a blue chip balance sheet. You'll need to shop around since your stream of income depends on how much you invest, your age, the interest rate, and other factors. Do you need a predictable source of income above what you'll get from Social Security--the best immediate annuity available?
You can buy immediate annuities that adjust for inflation, which is what I usually recommend. The tradeoff: Initial payouts are lower than those from a standard immediate annuity. But if inflation flares up sometime over the next three decades--a reasonable bet--the adjusted payout will rise and more than compensate for lower initial payments.
As you said, if you buy an immediate annuity you would only tie up some of your portfolio. It's a gamble on your life expectancy. The longer you live the better an inflation-adjusted immediate annuity looks.
One of the best resources for investigating the advantages and disadvantages of immediate annuities is the website analyzenow.com.