GOOD READS

3 Things to Know About Annuities

One of the worst fears people face in retirement is the threat of running out of money when they get older, perhaps in their 80s or 90s. No matter how big your stock portfolio and flush your 401(k), if the stock or bond markets take a dive at the wrong time, you can lose your savings just when you need it most. In retirement you can no longer replenish your savings, and it's too late to wait around for investments to come back.

One answer to the vicissitudes of investing is to buy an annuity, an insurance product that produces a steady stream of income for a period of time, typically the rest of your life. An annuity provides a steady income, month after month, that will never run out. But before you sign on the dotted line, be aware of these three potential pitfalls.

An annuity sounds simple, but it's actually complicated. You give a lump sum to the insurance company, and in exchange it sends you back regular payments for as long as you live. But there's an encyclopedia of variations on the theme. One example is the deferred annuity. Instead of contributing a lump sum, you make small payments over a number of years, building up savings. When you retire, the process reverses and the insurance company starts making payments to you. You can also get an annuity tied to the vagaries of the stock market. The insurance company invests your savings, and instead of promising a fixed payment, it offers you larger or smaller sums depending on how the investments work out. You can get annuities with death benefits, spousal benefits, and a variety of other features.

There are no guarantees. Typically, annuities are not tied to inflation. So the nice monthly payment that covers your expenses in 2012 could end up barely paying for dinner 20 years from now. Annuities generally do not benefit from government-backed insurance, so there could be a risk if your insurance company goes bankrupt. And many annuities are "chock-full of hidden fees," according to Elle Kaplan, CEO of Lexion Capital Management. You don't see the fees because they're not itemized by the insurance company, but you know they're there because the amount of your monthly payment is lower than what you can get from alternative investments.

Now is a bad time to buy an annuity. The amount you receive from an annuity depends on your gender, age, and current interest rates. Interest rates are now at historic lows, so annuity payouts are low. For example, if you're a 65-year-old woman, an annuity would pay you back about 5.5 percent per year. So if a 65-year-old woman were to give the insurance company $500,000, she would receive a payment of about $2,300 a month. But a few years ago, when interest rates were higher, a 65-year-old woman received 7 percent a year, which is closer to $3,000 a month.

So, is an annuity a bad idea? Not necessarily. If you are healthy, have good genes, and can expect to live into your 90s, then maybe an annuity is a good bet. If you're a big spender who cannot keep your hands off your retirement nest egg, then relying on someone else to hold onto it and give you an "allowance" might be a good idea. If you have a large retirement portfolio, it could be prudent to invest a portion of your savings in an annuity as a way to diversify your future income. But remember, in a sense, we all already have an annuity plan, in the form of Social Security. So do you really need another one?

Last week, when the whole world was salivating over the Mega Millions record $656 million jackpot, the question came up: would the winner be smarter to take the lump sum, or the annual disbursements? Financial experts trotted out their formulas and pointed out that the lump sum is a higher proportion of the advertised total than ever before. They agreed on the right answer: take the lump sum, not the annuity.

Tom Sightings is a former publishing executive who was eased into early retirement in his mid-50s. He lives in the New York area and blogs at Sightings at 60, where he covers health, finance, retirement, and other concerns of baby boomers who realize that somehow they have grown up.



More From US News & World Report

Quiz: How well do you know India's economy?

Question 1

Which of these products is India the world's largest producer of?

Poll Choice Options
  • Wheat
  • Rice
  • Milk
1
2
3
4
5
6
7
8
9
10

Latest News

  • Apple lifts Nasdaq; Ukraine drags on broader market

    The Nasdaq rose modestly in choppy trade on Thursday as Apple's shares rallied a day after the iPad maker's strong results, though tensions in Ukraine held back the broader market. Caterpillar Inc (CAT.N) shares jumped nearly 2 percent and helped limit the Dow’s loss after the world's largest maker of earth-moving machinery reported earnings that exceeded Wall Street's expectations. The three major U.S. stock indexes had opened sharply higher, with the Nasdaq initially climbing more than 1 …

  • Austin Modern With Replica Cadillac Showroom Asks $1.6M

    Have a nomination for a jaw-dropping listing that would make a mighty fine House of the Day? Get thee to the tipline and send us your suggestions. We'd love to see what you've got. Click here to view the full... …

  • Met office sees below-average monsoon in 2014
    Met office sees below-average monsoon in 2014

    India is likely to have below-average monsoon rainfall in 2014, raising the possibility that drought could stoke inflation and hit a sluggish economy dependent on the elements because half the country's farmland lacks irrigation. To cut dependence on rains, India plans to expand irrigated farmland by at least a tenth by 2017. The Indian Meteorological Department's (IMD) first monsoon forecast on Thursday was in line with the outlook of the World Meteorological Organisation that predicted …

  • Japan's NTT Docomo to exit Indian market - Nikkei

    REUTERS - Japan's NTT DoCoMo Inc will unload its 26 percent stake in its loss-making Indian mobile phone joint venture, Tata Teleservices Ltd, and withdraw from the country, the Nikkei newspaper reported. ... …

  • Tour the Arresting Interiors of the World's Top Meeting Rooms

    The Federal Parliament Building in Bern, Switzerland. Photo by Luca Zanier/Wired How much did the outcome of the Cuban Missile Crisis depend on the decor of the Situation Room? An open question, to be sure, but Swiss photographer Luca Zanier... …

IN-DEPTH ANALYSIS & INTERVIEWS

  • Leaderspeak with Vikram Limaye

    Vikram Limaye MD & CEO, IDFC Ltd shares many firsts from his life. …

  • The Greening of the House of Tatas

    How a dedicated team converted a 90-year-old heritage structure into a benchmark for environment-friendly buildings. …

  • Appy Voting

    Mobile and online apps, seeking to inform or influence voters, have been more active than ever before in this election. …

  • In the crosshairs

    Why the future of FDI in multi-brand retail looks bleak after the polls. …

  • Deserving the honour

    How do the winners of the two new banking licences - microfinance lender Bandhan Financial Services and infra institution IDFC Ltd - measure up to the challenges of operating as full-fledged banks? …

  • A Samurai from Chandigarh

    Advertising veteran Sandeep Goyal is disarmingly frank as he recounts his years with Dentsu. …

  • Falling in line

    Global investors gear up to working with Narendra Modi despite reservations about his secular credentials. …

MARKET MOVERS

  • Most Actives
    Most Actives
    NamePriceChange% Chg
    16.52-0.33-1.96%
    UNITECH.BO
    14.31-0.27-1.85%
    SUZLON.BO
    120.40+7.00+6.17%
    FRL.BO
    66.05+4.10+6.62%
    MANGCHEM.BO
    54.40+1.65+3.13%
    HCLINFO.BO
  • Price % Gainers
    Price % Gainers
    NamePriceChange% Chg
    16.20+2.70+20.00%
    JAGSONPH.BO
    53.50+8.90+19.96%
    RUSHIL.BO
    40.45+6.45+18.97%
    RCIIND.BO
    63.95+8.90+16.17%
    MRPL.BO
    24.00+3.10+14.83%
    NELCAST.BO
  • Price % Losers
    Price % Losers
    NamePriceChange% Chg
    10.95-10.95-100.00%
    4THGEN.BO
    17.30-17.30-100.00%
    ALFAICA.BO
    16.81-16.81-100.00%
    AMAL.BO
    11.73-11.73-100.00%
    BORAX.BO
    29.95-29.95-100.00%
    BRADYM.BO
  •  
    Recent Quotes
    Symbol Price Change % ChgChart 
    Your most recently viewed tickers will automatically show up here if you type a ticker in the "Enter symbol/company" at the bottom of this module.
    You need to enable your browser cookies to view your most recent quotes.
  • Recent Quotes News

    •  
      Sign-in to view quotes in your portfolios.