The Price of Security – Immediate Annuities

May 6, 2008

Money-Guy 05-05-2008

Safety and securityWith recent stock market ups and downs, immediate annuities are attracting attention from people looking to shelter themselves from volatility. But do they make financial sense? If so, for whom and when?

(An immediate annuity, you might recall, is an investment product that’s purchased with a single payment and begins to pay out a return right away.

In its simplest form, the annuity will pay you a set amount without fail until your death.)

Consumer Reports’ "Money Adviser Newsletter", a favorite resource of mine, recently examined immediate annuities in a research study titled, "Do immediate annuities really pay?". I enjoyed the article immensely because it provided a rare comparison of historical returns from buying an annuity versus investing in a diversified portfolio. It’s fact-based, highly detailed and data rich — qualities my listeners know I love :-)

Listen to the show and I’ll share my thoughts about both strategies and if/when they might be appropriate for you. As you’ll hear:

  • Variable annuities charge sales commissions that average 6-7 percent
  • Fixed immediate annuities charge sales commissions that average 2-3 percent
  • A retirement account withdrawal rate of 8 percent only has a 41% percent probability of meeting income needs for 25 years (assuming 100 percent stock portfolio). You can increase that probability to 96-97 percent by diversifying and lowering your annual withdrawal rate to 4 percent.

Overall, I’m excited that the immediate annuity market is evolving and becoming more competitive and more transparent. With savvy, low cost providers like Vanguard and Fidelity Investments focusing on this market, consumers should see even lower fees, better service levels, and more innovation going forward.


I bought a rolling duffle from High Sierra Sport Company a while ago and was quite happy with it until two of the zippers recently quit working. With a little bit of research, I found that High Sierra has a lifetime warranty on their products — and that they actually stand behind their products. Even lacking a receipt or original tags, I had a brand new bag within a week. It’s nice when a company truly stands behind their promises.

My long-term listeners already know that I’m a movie fanatic. Can I rave about Iron Man for a moment? I simply loved the movie. In an age when few movies are worth your time — let alone $9.25 for a ticket — this movie was worth every minute and every penny. Check out the movie and let me know if you enjoy it as much as I did.


Thanks for supporting and listening to the show! You’re a big part of our grassroots success. As always, please tell the Apple iTunes world if you’re happy with what you’re hearing each week … and email me personally if I can do something better.

[audio: https://moneyguy.com/podcasts/Money-Guy%2005-05-2008.mp3]

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