The Single-Premium Immediate Annuity

What is it and is it right for you? The immediate annuity (also referred to as a life annuity, or lifetime payout annuity) is the one annuity that could work for some people in their retirement years. This type of annuity would provide you a monthly income until death (or a specified period of time like 5 or 10 years) based on age, gender, and the amount of money you provided upfront to the insurance company. It’s like buying a pension. Social Security is a good example of what an immediate annuity would look like. The monthly check keeps coming in for the time selected or your death. When you pass, the money stops in most cases.


Why buy it? You want the guarantee of a specific payment coming in every month no matter what happens in the world or the markets. You want consistency in your monthly income (just remember that you pay for this with lower returns on your money). You want something you can count on month in and month out. You have no interest in leaving the money to kids/grandchildren/charities. P.S. You can annuitize a portion of your money. It does not have to be all or nothing. You could keep $500,000 in the markets and annuitize $300,000 for example.


Why not to buy it? You are comfortable with handling your own portfolio of stocks, bonds, and cash. You understand how markets work and you are focused on keeping your costs low (you own no-load index stock and bond funds), while tinkering with your accounts as little as possible (you avoid timing the market and chasing past returns). You want to leave money to the kids/grandchildren/charities. You have a plan and you are going to stick to it over many years and decades. WARNING: With current interest rates so low (2014), this would not be an ideal time to lock in a payment for life.


Where do you go? You want a highly rated insurance company that will not go belly up. I would avoid any insurance company below an A rating and even at that, remember there is no absolute guarantee on solvency. You also want to get the best deal you can, which means you should shop around and compare. I would start your search at Vanguard. Go here: Put your information in and see what pops out. might be another option that could work.


What will it cost? There is usually a 2% transaction fee upfront. For example: If you had a lump sum of $200,000, it would cost you $4,000. You might choose to pay this upfront or have them annuitize $196,000. The option will be yours in most cases.


Keep this in mind. If you want inflation-adjusted income, you will pay for it with a lower monthly check or more money upfront. If you want to set up other people to receive money in the first 10 years (money going to a beneficiary for example), you will pay. Basically, you will pay for anything extra in the form of a lower payout (or money upfront). When you tack on extra benefits, you pay for it.


Other Annuities

            Annuities are life insurance products that promise you guaranteed returns with no risk of loss of capital. They end up charging high fees to pay high commissions to their salespeople. You will pay for those commissions either directly or indirectly through the fees charged to your account. Periodically, the life insurance industry invents a new product that is “better” for the investor. Don’t believe it. They just find different ways to repackage the same expensive insurance products. Let’s take a look at a few different annuities.



            The fixed income annuity is a poor option. The insurance company promises you a certain guaranteed return each year. The first year usually has a teaser rate that will entice the average investor (4% return for example when you are getting .2% in the bank). After the first year, the rate tends to drop to something not so impressive (under 3% for example). You have no real recourse because your money is locked up in a prison and if you want it, you will end up paying a large surrender charge. STAY AWAY from this type of annuity.


            The variable annuity is another poor option. This type of annuity promises you returns that replicate the stock market more closely. Promises are made, but high returns are unlikely to happen. These types of annuities can easily run you close to 3% per year in fees. As noted earlier, the fees are used to pay for the high commissions paid to the life insurance agents and financial advisors who sell them. AVOID this type of annuity and the salespeople who sell them. It is one of the worst annuities currently available.


            The index annuity is the new kid on the block, but it is still a poor option for most people. The pitch sounds pretty good. Returns that track an index (like the S & P 500) when markets go up, but you are guaranteed not to lose money when markets go down. Sounds good, right? You end up paying handsomely for that guarantee. The returns will be far below the index as they make promises of possibly 6% per year. Actual returns end up closer to 3% or less for many (after they have locked up your money of course). STEER CLEAR of this type of annuity.


            If you have an annuity, there are options. You can do a 1035 exchange to an annuity at Vanguard and cut your costs dramatically. Vanguard annuities have no loads and the yearly fees run around .50% per year. Before selecting this option, identify if there are surrender penalties (this usually occurs in the first 7 to 10 years that you own the annuity). Vanguard will help you with this process at no cost. Give them a call (800-357-4720) and speak to an annuity specialist to save on yearly fees.


 You might be able to convert your annuity to a traditional IRA if the money is qualified (pre-tax). This will improve your situation dramatically as you drop your fees down to something close to .10% using stock and/or bond index funds. Take control of the situation before someone else does!