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Your Financial Future

Are Annuities Right for You?

  • Payouts may fluctuate with interest rates
  • "Laddering" helps spread the risk
  • Values can adjust due to inflation


Even so, “I think there is a sudden awareness of the downside of risk that has translated into more interest in fixed payouts,” Mitchell says. She says that buyers should make sure the insurance company providing the annuity is highly rated and strong. Mitchell also likes the idea of annuities that increase with inflation. Although few companies offer inflation-indexed annuities and they are more expensive, she says they keep your purchasing power intact for life.

Scott Hudson, chief investment officer for Seeman Holtz Financial, a national company headquartered in Hollywood, Fla., that advises investors age 65 and older, says Seeman Holtz uses annuities as part of an income plan for its clients. “Our message always has been: Let’s reassess your risk, and let’s get more conservative. When we speak to people about that message in this market and last year’s market, it’s been very well received.”

Some developments are under way in the annuities market that may increase their use, Mitchell says. Some employers are considering offering annuities as a choice in retirement savings plans such as 401(k) plans, which could allow workers to put aside a portion of their savings to create guaranteed income.

Some companies are also beginning to offer “longevity annuities.” Instead of the stream of payments beginning when you invest, the payments kick in when you reach an older age—for instance, 85. As a result, the payments are larger. Some countries, including the United Kingdom and Germany, mandate longevity annuities, Mitchell says, to protect the government from having to provide for retirees who run out of money. She adds that other new developments may include annuities that pay at one rate as long as you are healthy and at a higher rate if you require home care or nursing home care.

Shopping for annuities can be difficult, in part because the features are not standardized. Although this is less of a problem for single-premium, fixed-payment annuities than for products such as market-indexed annuities (which for some investors turn out to be a money-losing product), Mitchell says she would like to see more standardization.

Immediate Annuities.com compares prices from participating companies and can give you an idea how much in monthly payments an investment can buy. You can also find information online from insurance companies, such as Berkshire Hathaway and MetLife.

One advantage of having monthly income from an annuity has come home to me during the current crisis. Because I have that additional income, I don’t feel pressured to sell any of my much devalued investments and can wait for the markets to recover.

“If people have a retirement income plan and feel confident that they have a certain stream of income, they then feel they have more flexibility to invest in the equities market or to stay invested for the long term,” says Fidelity’s Bloom. “Hopefully, their ending assets will be higher.”

Hopefully.

 

Martha M. Hamilton, a former writer and editor for the Washington Post, writes a regular column, Your Financial Future, for AARP Bulletin Today.

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