Deciding how to best utilize your assets to replace your income in retirement can be daunting. There are a lot of options that can accomplish the goal based on what is important to you. One of those options is an immediate fixed annuity. There is a lot of controversial and conflicting information out there about annuities. At Zynergy, we tend to shy away from most types of annuities for being overpriced and to avoid solving one risk by creating another. However, a fixed immediate annuity can be a useful tool for a retiree in the right situation. Before making any decisions about whether a fixed immediate annuity is right for you, it is important to know what you will be getting in exchange for what you will be giving up. Fixed immediate annuities, like most things in life, are not a free lunch but under the right circumstances can offer exactly what a retiree is looking for.
Pro’s of an Immediate Fixed Annuity
- Sleep – The annuity option is traditionally the best option for your peace of mind. There is something very comforting about knowing you will get a monthly paycheck regularly for the rest of your life. If watching your investment portfolio fluctuate causes anxiety and insomnia, you may be the perfect candidate for an immediate fixed annuity.
- Longevity – People today live longer. Medical advancements and healthier lifestyles have led to projections of most baby boomers living longer than they expect. The annuity option is a fantastic decision if you outlive your life expectancy. It pays until the day you die, even if that is at age 110.
- Safety & Security – Although nothing in life is guaranteed, the certainty of most annuity payments is very strong. Most annuities are backed by re-insurance companies (large companies that will be an additional back-up in the case of a default by the annuity provider) or the state. This leads to a very safe and secure cash stream in most cases.
Cons of an Immediate Fixed Annuity
- Loss of Cash – You may have a nice stream of income, but you must pay a large lump-sum to get it and that means losing large chunks of money potentially available for big-ticket purchases or emergencies. If your child needs to borrow $50,000 for a bridge loan to build a house, your annuity can’t help.
- Inflation – The silent killer of a robust annuity payment in early retirement is inflation. For those of you who skipped Econ 101, inflation is the gradual increase in prices over time. Most annuities today do not have a cost of living adjustment attached to them (and if they do, you will pay an expensive price for them) so a $3,000 monthly annuity payment today will be $3,000 in 25 years. That may seem like a decent chunk of change each month when your property taxes are $8,000 a year, but in 25 years when they gradually reach $25,000, you may be wondering where all of your money went.
- Estate Planning – The major downside of purchasing an immediate fixed annuity is the loss of the asset to buy it. This means, with few exceptions, if you and your spouse are in the car for a nice Sunday drive the three years into your retirement and are killed in an accident, there will be nothing left for your heirs. The stream of cash dies with you and this can be very troubling when deciding to give up hundreds of thousands of dollars for a few thousand dollars a month. There are products that will guarantee a lump-sum to your heirs if you die early, but again, they will cost you and possibly defeat the purpose of the annuity.
When contemplating which decision is right for you, think about your values and beliefs. Is it more important to have safety and security or more money and access to it? Is inflation protection important to you or are you more worried about longevity? This is an important decision, but armed with the right information, you can decide what strategy will provide you with what you value most.