The Case against Immediate Annuities

You turn over a chunk of cash to an insurance company and they send you money for the rest of your life. The problem, say, financial advisers, is that payouts are currently low compared to past years.

Retirees who have seen their nest eggs scrambled by the fallout from the market plunge have been urged by some experts, including members of the Obama administration, to look to immediate annuities as insurance that they won’t outlive their savings. Other market analysts disagree, however, citing several drawbacks to immediate annuities that consumers should consider before buying.

The basic concept of an immediate annuity is simple — you turn over a chunk of cash to an insurance company and the company sends you money for the rest of your life. How much money depends on how old you are when you buy the annuity; the older you are, the bigger the payout. Men also tend to get bigger payouts because, on average, they don’t live as long as women.

The problem, say, financial advisers, is that payouts are currently low compared to past years, because of the low interest rate environment the economy is in. The payout on an annuity, which currently runs about 7.5% for a 65-year-old man, may seem generous compared to a Treasury bond, which yields about 3.6%. Unlike a bond, however, where you get your money back at maturity, the cash you put into an annuity is gone forever. And, unlike a bond, you’re locking in the current interest rate forever.

Annuities may be a place for a portion of your retirement funds, say financial gurus, but, if so, they advise spreading your purchases over several years, in case future interest rates are more generous. You should also deal with top-rated insurance companies that have a demonstrated ability to keep those checks coming.