The Price of Security – Immediate Annuities

Money-Guy 05-05-2008

With 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.

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