Ask Money

Immediate annuity

Chris Farrell Jun 21, 2010

Question: My husband and I will be 60 this year and our retirement savings will, under very conservative scenarios, provide a good retirement income well into our 90s without touching the value of our house. We asked our financial advisor (we pay him an hourly fee) if we should take some assets and purchase an annuity that takes inflation into account (at least when interest rates offered for annuities rise a bit – now the best we see is 3.75%). His advice was “no” – that the only people who need an annuity are those who are spendthrifts or who are in a tax bracket to benefit from a variable annuity. Do you agree? Carol, Maple Grove, MN

Answer: Your advisor has access to a lot more of your financial information than I do. So, I can’t judge the specifics. But as a general rule I don’t agree with his overall assessment of immediate annuities.

To be clear, I’m not a fan of many kids of annuities. I do think an immediate annuity can have a place in a retiree’s financial portfolio, and I am assuming this is the annuity you’re discussuing with your advisor.

With an immediate annuity you get a predictable monthly, quarterly, or annual income on the investment for the rest of your life. It offers you a measure of financial security.

It’s true that many financial advisors have looked down on immediate annuities.The reason is that you’ll already get an annuity income that adjusts for changes in the consumer price index–Social Security. Advisors have traditionally preferred that retirees keep control over the rest of their money.

But after two recessions and two bear markets in less than a decade a number of advisors have come to appreciate the value of an annuity. It buys greater peace of mind during turbulent times and another source of secure income for an aging population. As certified financial planner Percy Bolton, who heads his eponymous firm in Pasadena, Calif., told me, immediate annuities used to be seen as a bad thing, “but now we look at them as a buffer to provide an income stream.”

I’m glad that you’re intrigued by an annuity that adjusts for inflation. 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. Here’s a link to a post I did on what to look for in an immediate annuity.

In 2008 I had an interview with Henry “Bud” Hebeler for Bloomberg BusinessWeek. He was formerly head of Boeing’s giant aerospace unit. When he retired he was soon disgusted by much of the advice in the retirement-planning industry. He started a new career dispensing conservative financial advice that can be curmudgeonly but is always insightful. (Visit his Web site, It has a lot of good calculators, too.) He mentioned an inflation-adjusted immediate annuity during the interview:

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