Out-of-Touch Annuity Advice?

by David D. Holland




Reader Question: “I recently read an article in April’s AARP Magazine that described an ‘immediate annuity’ as ‘a simple and relatively safe way of converting a portion of your savings into retirement income.’ Are they right? Is this a good way to get retirement income?” – Lee P., Palm Coast


I read the article, Lee, and it would appear that the AARP (American Association of Retired Persons) is out-of-touch with the practical use of annuities for retirement income. An immediate annuity would rarely be the proper choice for retirement income given the current interest rate environment and the competitive alternatives available in today’s marketplace. In fact, I’ve only recommended this particular type of annuity a handful of times in last twenty years . . . and, I’m not alone. Of the $230 billion that went into annuities in 2013, a paltry $8 billion (less than 4%) went into immediate annuities (according to LIMRA SRI).


The Basics: With an immediate annuity, you exchange a lump sum payment for a lifetime of income from an insurance company. The payments can be for a single lifetime or for a joint lifetime with your spouse (payments continue as long as one of you is alive). You can also buy payments for a specified number of years (then it is referred to as a “period certain” annuity).


Advantages: 1. For a lump sum payment, called a “premium,” you receive a predictable monthly income no matter how long you live. 2. Even if you live long enough to get back all of what you paid in premium, the insurance company is contractually obligated to keep paying. 3. If after-tax (non-qualified) money is used to purchase an immediate annuity, special tax treatment is applied – only a portion of each payment is subject to income tax.


Disadvantages: 1. When a person dies, the insurance company will stop making payments and keep the rest of the premium. If, for example, someone were to spend $50,000 for an immediate annuity and then died after receiving just three monthly payments, the insurance company would get to keep the rest of the money (the policy can be set up so payments continue for a minimum number of years for beneficiaries, but monthly payments are substantially reduced). 2. Immediate annuities are irrevocable; there’s no surrendering this type of annuity. At best, the owner might be able to sell the immediate annuity to a third party purchaser of such policies (but, for just pennies on the dollar).




David D. Holland, a CERTIFIED FINANCIAL PLANNER™ practitioner, hosts a weekday radio show at 9AM on AM1380 Ormond Beach, AM1230 New Smyrna Beach and AM1490 Deland. He has also authored two books in his Confessions of a Financial Planner series. Holland offers investment advice through Holland Advisory Services, Inc., a registered investment adviser in Ormond Beach. He can be contacted at (386) 671-7526. Email your financial questions to info@DavidHolland.com.