Great Article About Annuities

I know that many investors' ultimate goal is sufficient income to live on in retirement. One tool that financial planners often suggest is the annuity. The following article is taken from the Wall Street Journal, dated July 10, 2009. It was written by Brett Arends, and I think it provides an excellent, clear explanation about annuities. You may want to check out the website cited in the article, http://www.immediateannuities.com/, and play around with their calculator.

In a future post, I will explore some scenarios that compare annutities to dividend stock portfolios.

Thanks to the financial crisis many people will have to reconsider the legacy they'll leave behind.

Ross Schmidt, a financial advisor in Denver, sat down with a well-to-do client last fall, just after the stock market had collapsed. The client was in her sixties, divorced, with two adult sons. "We were scrambling to stem losses in her portfolio" and re-evaluate retirement plans, Mr Schmidt recalls. He asked his client how much she wanted to leave her sons.

"Well, now, nothing," she replied.

She will not be the last to reach this decision -- especially if the stock market stays down.

Millions of families are struggling with new financial realities, including heavy losses in many retirement accounts, and more prosaic expectations for future investment returns. Those near retirement face the hardest choices. Should they keep working for longer? Revise their retirement plans? Scale back their standard of living now to conserve money for later?

One idea that should be in the mix, much to the dismay of your children: Leave less to your heirs. Or even nothing at all.

Single-premium immediate annuities, an insurance product that converts a lump sum into a lifelong income stream, let you squeeze a bigger annual income out of your retirement savings than you otherwise could. That's because people who buy them both give up their financial legacy, and effectively pool longevity risk with other customers.
If you want to live off your investments' income, you should make sure they will last if you live into your nineties or beyond. But this strategy can limit the amount you can withdraw safely each year.

But if you buy an annuity, those who die quite young subsidize those who live to 110. (Another insurance product, Longevity Insurance, offers an alternative way to handle this.)

Annuities come in a variety of styles. They can have fixed or variable payments. Joint Survivor, for a couple, will keep paying until both spouses have died. So-called "period certain" annuities guarantee payments for five or ten years, so if you die one month after buying it your heirs don't lose everything.

Web sites such as immediateannuities.com offer comparison-shopping tools for the curious or the confused.

Here's how they work: Metlife this week said a 67-year-old woman with $1 million could convert that into an income of about $75,500 a year until she dies. For a couple a joint survivor policy would pay about $68,000.

What Metlife doesn't mention about that woman's million, of course, was that in this scenario, her kids get nothing.

The annuity route isn't for everyone. David Hultstrom, a financial planner in Woodstock, Georgia, points out three concerns. Annuities aren't a great deal right now, he notes, because interest rates, which drive returns, are pretty low. Investors still face credit risk -- insurers can collapse, and state backup pools may only protect part of your policy.
Furthermore, he adds, typical annuities leave you vulnerable to inflation, which is a widespread and growing concern. To allay concerns, some insurers have started offering inflation-protected annuities. But inflation protection comes at a price, in the form of a lower starting income.

Converting your savings into an annuity also entails giving up liquidity and control over your money in exchange for an annual income. And, as usual, when dealing with complex financial products you need to keep an eagle eye on costs.

But most people's concerns may be more familial than financial. Is it OK to leave nothing to your kids -- especially if you inherited a bundle from your own parents?

Wiping out your wealth when you go -- "filing Chapter Heaven," as it were -- might sound like a scorched-earth plan. The cynical might even suggest it fits well with the locust-like financial behavior of the Baby Boomers, who consumed a golden legacy and have left their successors trillions in extra national debt.

Maybe it's selfish, maybe it isn't. Either way, unless financial markets recover soon, many may find they have few other options.