Tuesday, October 12, 2010

Annuities? From Never to Maybe

There are various ways to grow financially.

And not all of them are actually financial!

Sometimes, there's emotional grow as well, a matter of changing one's mind.

I'm getting there when it comes to annuities.

I know that we old fogies are supposed to be set in our ways but life has a habit of changing things. Witness my previous, long-held aversion to bonds. Nothing like a recession to rearrange one's priorities! I'm now upping my bond quotient, which, at my age (Ahem! Umm--61) is probably long overdue, though it has taken me some time to come to that conclusion.

Now I'm rethinking another aversion--to annuities.

This article, by Money Magazine's Walter Updegrave, not only mentions my major concern (that annuities are too expensive for the benefits they grant, particularly if I exit this mortal coil sooner than expected) but has some solutions that provide safety while not tying up all one's funds.

I expect to retire with around $400,000 in my 401(k), which, with my Social Security, should provide me with about $50,000 a year. Since I calculate that I really only need about $36,000 after taxes to live comfortably in retirement, I could afford to put at least $100,000 into a guaranteed annuity. Unfortunately, there is no pension in Grace's future.

I haven't made any final decisions, and don't intend to for a few more years. I figure the payouts can only get better, given how low they currently are.

But unlike past decisions to never consider annuities, these days I'm listening. And reading. And, yes, considering them.

10 comments:

Nicole said...

I completely and totally trust Walter Updegrave.

And hey, one of our newest Nobel prize winners (Peter Diamond) is very pro-annuities, even in the current fee situation. He thinks the insurance aspect makes them worth it (assuming you get an inflation adjusted something something... probably whatever Walter Updegrave suggests)

MasterPo said...

MasterPo can tell you this:

MasterPo's mother had a pension that, after deductions, netted about $700/mo. That was sweet.

An annuity is the only way MasterPo can think of to guarantee a more or less (presuming a variable annuity) stream of monthly income.

Monthly deductions from an IRA or 401k will eventually run out.

Have you looked into "no load" annuties like at Vanguard?

Grace. said...

Master Po--I have holdings with Vanguard already, in their Total Stock Market fund and their European fund. Vanguard is the first place I'd check for annuities.

Nicole--I, too, am a fan of Updegrave.

Morrison said...

Geeze, when I mentioned a few days ago that I was considering annuities, my readers read me the riot act! I know annuities are the way to go now. Things are different! The old way of thinking must make way for the newly structured investment opportunities.

duh?

Sharon said...

I get so frustrated when I hear other people talk of their "pensions". I want one, and the only way I can think of getting one is through an annuity. Security of something is better than nothing. I agree with you and MasterPro!

MasterPo said...

You want the guarantee, you're gonna pay for it.

It's that simple.

BTW, an interesting statistic: Most annuity holders do not annutize! They take systematic withdrawls instead.

Grace. said...

Master Po--I'm not understanding what you're trying to tell me? People with annuities don't 'annuitize?" Explain please--grasshopper isn't getting it.

Janette said...

I'm not convinced.
I know financial companies (and their partners the financial magazines) are pushing annuities right now. Something about it doesn't ring solid. I guess I will have to do more research.

MasterPo said...

Grace,

"Annutize" means to switch from buying into the annuity (most people make periodic payments in over the course of their working life time like with an IRA or 401k) to the life-time payout.

With the straight-life payout option once your die that's it. End of payments. There are many twists annuties offer - joint, joint/survivor, period certian etc. - too that offer more than just your life but the individual payments are less (the longer you want them to pay the less each check will be).

Most annuities also offer a 'systematic withdrawl' feature which is basically the same as taking periodic payments out of an IRA or 401k.

With an annuity when you want to start taking money out you must chose one of these options. After payments start the choice is (usually) irrevocable.

Statistically speaking most annuity owners actaully take the systematic withdrawls rather than the life time payments. Doesn't make much sense to MasterPo - why go with an annuity if you don't want the life time payments? - but that's what it is.

MasterPo said...

Janette - More than ever (in recent memory at least) people are scared about running out of money. Annuities can help prevent that. Not a silver bullet by any means but it's an option. And as with anything financial there are a dozen or more caveats and variables to consider.

But it has made annuities more popular.