Many retired clients have asked us about buying Single Premium Immediate Annuities. These are the kind of annuities that send out a monthly paycheck beginning day one (or whenever you specify). We like the idea of an income that you and your spouse cannot outlive, and one that may have a guaranteed value to your estate, if you die within, say 20 years. When used in combination with a growth oriented portfolio, these annuities can be a very powerful retirement income planning vehicle.
However, there is a catch: right now the actual earnings rate of such an annuity net of commissions and all other fees, works out to under 1%. This is based on a couple, with the surviving spouse dying at age 88. Even policies with inflation protection, where the income goes up 3% annually (say from 0.900% to 0.927%), average out to about the same rate of return, under 1% if the second of the two of you dies at age 88. That is because these inflation-protected policies start at much lower rates. You think that very smart insurance company actuaries and MBA’s spend much time thinking about all of this? You bet! Can we do better than that in our fixed income portfolios? Well, yes, we have in the past.
Of course, if you live much longer than average, then you will get a better return on your money. Other bells and whistles are often added to annuities these days, and few of them truly work to the benefit of the investor in the long run.
If you have thought about the sleep-at-night that an annuity might create for you, we understand. The approach that we might recommend, is to wait for rising interest rates. Within the next several years, we might see these annuity rates up above 3% once again, where they have averaged for the last 60 years. At that time, a part of one’s portfolio invested to create an income stream guaranteed by a high quality insurance company might make sense for some clients, especially those who are most concerned about outliving their money. All of our clients have different needs and we will consider all of the above when we talk to you about your investment planning process.
Of course, we do not sell, market, or get paid commissions or fees on annuities, or any investments that we recommend for our clients. We are always Fee-Only and proud to be so!