My 4 Best Ideas for Annuity Buyers
Like any other product on the market, sales pitches for annuities (be they immediate, deferred income, secondary market, or any other annuity type) are designed to cast each company's product in the most persuasive light possible, highlighting the best features and leaving the rest for the fine print.
If you're not a financial expert, the details can be confusing; making a smart purchase decision can feel daunting at best.
Here are the 4 best pointers I can give to an annuity shopper:
1. Relax – Making sense of it all will happen over time.
Never buy something you don’t understand, especially if you're feeling pressured. Whether you call me or another trusted advisor, you can make a smart annuity decision, by taking more time. So if you're feeling overwhelmed it's just a sign you need to get more reliable information or assistance.
2. Focus on the contractual guarantees.
Many annuities are over hyped with sign-up bonuses and income riders that sound too good to be true. Like anything else in life, if it sounds too good to be true, well … you know the rest.
Always ask your advisor or agent to explain the contractual realities of the annuity policy, not the promises. Features that may seem exciting up front may cost you more in the end.
The important thing you need to know is how the annuity will work for you month after month, year after year. Don’t sign an application until you understand this.
3. Don’t get overwhelmed by interest rate forecasts.
Lots of people can guess about the direction interest rates are headed, but the truth is, no one knows for sure. Remember double-digit rates in the 80's? None of us would have expected rates to go as low as they have in recent years.
Base your annuity purchase decision on what you know to be true and look for a dependable and comfortable rate of return. Above all, do not feel pressured by a salesperson’s forecast of the future direction of interest rates.
4. Someone will always tell you what you want to hear.
You are a seasoned consumer and most likely have been filtering out sales hype all your life. Nevertheless, people get in trouble every day by putting common sense aside when shopping for something they don’t quite understand. This can be devastating when making an important investment decision.
Trust your instincts, and do not allow yourself to be persuaded by “what you want to hear.” If you are searching for that dream annuity product that is too good to be true, there are agents that will unfortunately validate that dream to achieve a sale.
Look no further than the annuity promoters who pitch double digit returns which contractually have no chance of ever happening. If this happens, move on to an advisor you can trust.
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Comments (6)
Joe
2015-06-12 10:17:47
I am planing to invest roughly $360,000 into a 20 year certain immediate annuity with payments starting in January, 2016. In order to simply mitigate risk (which I know is already low), is there a reason I would not want to purchase three separate annuities, each in the amount of $120,000?
Thank you!
By the way, I was doubtful that I would not receive phone calls when I requested information from you but have been pleasantly surprised. That integrity of honoring what your site said will gain you a new customer.
Hersh Stern
2015-06-12 10:19:43
Hi Joe-
Really nice to hear from you and I especially appreciate your thumbs-up and acknowledgement!
You asked what I thought about your decision to split the premium three ways. I think it's a great approach and I often recommend that to clients who ask.
It is true if you invested a smaller amount of premium with each of three companies instead of buying one larger annuity that your aggregate monthly income from the three will be about 1% or 2% lower than had you purchased one annuity from the highest paying company. That's due to two factors:
First, many companies pay a tad more income on larger premiums. In your case, you'd be giving up that slight bonus.
The other reason is by splitting the premium in three parts you in effect are buying two-thirds of your annuities from companies that are not the most competitive. So you'll end up with a little less income than if you placed the full investment with the very topmost competitive company.
On the other hand, since one of the main reasons people buy immediate annuities is to secure an income stream, you're certainly adding greater security by diversifying your nest egg. I'd look at the 1%-2% reduction in income as a price worth paying for added peace of mind.
By the way, more than half of our clients who spend more than $200,000 on annuities split the premium into $100k parcels on average.
I'd also like to draw your attention to a blog I wrote on the state guaranty system which addresses your question in more detail. Read especially the Q&A section at the bottom of the page. You can find that article here:
https://www.immediateannuities.com/state-guaranty-associations/
Hersh
David
2015-06-15 09:40:01
I will be retiring within the next 12-14 months. I receive a modest pension and a near max SS benefit. I will have somewhat over $200K in an IRA and am thinking about using half of this for an immediate annuity and leaving the other half in the IRA, so I have access to some funds for emergencies. Does this sound reasonable?
Hersh Stern (ImmediateAnnuities.com)
2015-06-15 09:45:56
Hi David-
A good way to calculate how much to invest is to add up your regular expenses in retirement, subtract any guaranteed sources of income, such as Social Security and your pension, and buy an immediate annuity that provides enough income to fill in the gap.
We have a retirement savings calculator on our site which can help you go through the steps, here:
https://www.immediateannuities.com/retirement/retirement-savings-calculator.html
When you do the math, add all of your known expenses and sources of income. For example, add together your monthly expenses for housing, utilities, food, auto(s), all insurances (home, car, health) and other regular expenses. Then add up your pension plus Social Security plus any income from rental properties (after expenses) and other investments.
An immediate annuity will give you dependable income every year for the rest of your life - no matter what happens to the stock market or interest rates. But because these payments never change, your purchasing power will shrink over time with inflation. While some insurers offer immediate annuities with inflation-adjusted payouts, they start with much lower monthly payments in the beginning.
In summary, I agree with you about not tying up more than 50% of your retirement savings in an immediate annuity. This will let you invest some money at higher returns to keep up with inflation. Also, remember that once you've handed over your lump sum to buy the immediate annuity you won't be able to tap it again (except in very limited situations and only if you bought your annuity from one of the few companies that lets you do that).
One last suggestion: since you were asking about the right percentage to invest in an immediate annuity in your situation, perhaps you would benefit from a more in-depth review of your finances and retirement plans with a fee-only financial planner. I have some ideas on how to select a financial planner here:
https://www.immediateannuities.com/retirement/how-to-find-a-financial-planner.html
-Hersh
Dan
2015-08-05 11:29:35
I am a 66 year old male with $130,000 split 50/50 between a money market fund and an S&P index fund. Would it be better to buy a single premium immediate annuity when I retire at age 68 or buy a 2 year deferred income annuity now? I am assuming that interest rates will increase a little over the next 2 years.
Hersh Stern (ImmediateAnnuities.com)
2015-08-05 11:47:25
Hi Dan-
I've separated your question into two parts.
1. Where will interest rates be when I'm 68?
You wrote that you think interest rates will be a little higher in two year. Perhaps. But to me it's anyone's guess.
For the past 33 years interest rates have been in a protracted down trend. And every year since 1982 they've been many talking-heads who've been predicting that rates are just about to rise. They've been wrong.
At some point, interest rates will begin to rise again and the pundits who predicted so that year will be heralded as genius market timers. You won't hear from them that they'd been saying the same thing for 10 years. But, I guess that's the nature of it.
I have a lot more to say about interest rates here:
https://www.immediateannuities.com/annuity-trends/does-an-annuity-make-sense-with-low-interest-rates.html
2. How much money will I have in two years?
You already know the stock market is volatile. Your S&P fund could be 50% higher in value in two years. Or, there's a risk that when you reach age 68 the economy will be in a deep recession and your fund will be worth half of what it is today.
So considering the uncertainties, I'm not able to guide you either way. You may be better off waiting to buy the annuity in two years. Or, you may look back with regret at having missed this opportunity.
Hersh