Annuities: Why You Shouldn't Annuitize

 By: Jeffery Voudrie Platinum Expert Author
As more companies do away with their pension programs, the insurance industry and the media are heavily promoting the use of immediate annuities to provide a dependable income stream during your retirement. But is that in your best interest? Normally, I say it is not. Read on to find out why.

An immediate annuity is one where you pay an insurance company a lump sum in return for a stream of income. You can decide if the income stream is guaranteed for a certain number of years (period certain), for a set number of years or your lifetime-whichever is greater; and whether your spouse should receive benefits for his/her lifetime after your death. Since you can receive a set payment for life and can also provide for your spouse after your death, this is seen as a 'perfect' pension replacement.

There are four main reasons that I don't advise this.

First, when you buy an immediate annuity you exchange a lump sum for a series of monthly payments. The lump sum is gone...forever. At that point your return is dependent on how long you and/or your spouse live (unless you chose period certain). If you live longer than the life insurance company expects then you get a higher overall return on your investment. If you die before then your return drops considerably.

For instance, Jack and Jill are both 62 and buy a joint life annuity for $250,000. In return, they'll receive $1468 every month for the rest of their lives, regardless of who dies first. After the remaining spouse dies, that's it. Nothing goes to your children.

Assuming their joint life expectancy is 85 years old, the internal rate of return on the annuity is about 4.6%. If they both die at 75 years old their average annual rate of return is negative 1.3%. If at least one of them lives to age 95 then the return on the investment was 6.1%. So your expected return is 4.6%, but your actual return may be more or less.

That illustrates another reason that I don't think people should annuitize-all they are doing the first so many years is getting back THEIR money. Picture putting that same $250,000 under your mattress. Then each month you reach in and pull out $1468. You wouldn't run out of money until 14 years later! That's if you aren't earning interest on it.

If you just put the money in a money market earning 3% you could keep using it until age 80. Interest rates have been going up and some money market accounts are paying 4.75%. Use one of those (or buy a 30-year Treasury bond) and you would cover the payments until one of you reached 86.

There are other benefits of not annuitizing. If your situation changes and you want/need access to more than the $1468 a month, you have access to the remaining principal. If you die before the money runs out the remainder can go to your children. The return you receive isn't based on how long you live but on how it is invested.

Over time, inflation is your greatest risk. Jack and Jill's annuity payment does not increase for inflation each year. If it did, it would be much lower to start with. Doing it yourself allows you to increase your payments over time if needed and/or based on your return.

Obviously, I feel there are better ways to invest $250,000 than putting it in a money market or CD. Over a similar period of time, a well-managed, well-diversified portfolio of stocks, bonds and real estate should average 8% or more. If so, you can meet the same income payment, adjust it for inflation and possibly never even touch your principal. Even if you end up using some principal, the chances are much greater that there will be money leftover for your heirs.

Some would rather let an insurance company bare the risks for them. There are risks to doing it yourself: interest rate risk, undisciplined spending, market risk, etc.. But these are easily mitigated in a well-managed portfolio, and are far outweighed by your ability to earn a higher return while maintaining access and control of your money.
loading...
Author: Platinum Expert Author
Artice Source: http://www.articlesphere.com

Related Articles in Annuities


People interested in the above article are also interested in the related articles listed below:

Annuities are best for old people and people desiring to opt for it. However, many agents fake the annuity policy and claim unnecessary and illegal money from the insurers. This is normally done without taking into account the status of medical fitness and the health over the ageing persons. For younger generation the annuity proposal is the best but for older people opting for it without any medical certification lead to trouble ahead. It is best for senior citizens not to opt for annuities as it is not at all beneficial to them.
Are you thinking yourself... "How should I get the best deal on annuity rates?" If the answer is yes then you might be attracted to the following guidance on annuities. Taking just a short while to understand how the pension annuity system works could be worth thousands of pounds in the future. Straight from the off you should know that it is key that you shop between providers for the best annuity rates. Not completing this process will mean that you cannot be sure of the best rates. This could mean you miss out on a higher retirement income.
An annuity is simply a contract whereby for a fee you can be guaranteed an income for the entirety of your retired life. The regular income from an annuity can offer you security for when you retire. Annuities must not be taken lightly though and it is always recommended that you take the advice of a professional before decide to take up any annuities.
loading...

More in Annuities

Excellent, Larry. Thank you for taking the new article directory technology and making it work to the max. I encourage everyone to keep contributing and contributing regularly. I can attest to the fact that this site is already a strong directory in a field of many. Kudos to Larry!

Matthew C. Keegan
The Article Writer

 

I find it a delight to use both as an author and a publisher. It is full of nice little surprises that make the whole process of writing, reading and publishing articles a complete delight. This is one that comes out tops and beats the rest hands down.

Eric Garner
Managing Director
ManageTrainLearn

 

I did a Google search and came across your site. It was exactly what I was looking for and was elated to find such a broad range of articles. As I am launching a free magazine in a small town in Florida, I wanted to be as resourceful as possible while still being able to provide some content that is interesting and well written. Your site has all the variables in the mix. Excellent Site hitting all the notes in the scale sort of speak.

Mo Montana
Florida, USA

Article Topics

 
Copyright © 2005 - by Larry Lim, Singapore - Article Search Engine Directory at ArticleSphere.com™
All Rights Reserved Worldwide. All Trademarks and Servicemarks are the property of the respective owners.
ArabicBulgarianCatalanChinese (Simplified)Chinese (Traditional)CzechDanishDutchEnglishEstonianFinnishFrenchGermanGreekHaitian CreoleHebrewHindiHungarianIndonesianItalianJapaneseKoreanLatvianLithuanianNorwegianPersianPolishPortugueseRomanianRussianSlovakSlovenianSpanishSwedishThaiTurkishUkranianVietnamese