Should You Wait to Buy an Annuity?

Many retirees are turning to annuities to provide income and/or growth with no downside risk. Let’s forget for the moment the costs and other problems associated with variable annuities in particular. The question I want to briefly address is – assuming that an annuity is part of your retirement planning – whether you should wait to purchase one.

You probably have guessed where I am going with this. Today’s economic environment of low interest rates and volatile markets has negatively affected annuity benefits. The insurance companies that sell annuity products are engaging in “de-risking” activities by decreasing income payouts, increasing fees and adding more complicated provisions that favor the insurer.

For example, one large insurer – MetLife – sells variable annuities with a lifetime income rider promising a guaranteed withdrawal rate. For many of those annuities, the withdrawal rate was recently lowered from 5.5% to 5.0%. You may be thinking that 5.0% still sounds darn good today. Don’t forget that this is not truly comparable to an interest rate on money deposits because (a) your principal may not be available to you and (b) you are paying substantial fees just to have this income rider in place.

Fixed income annuities are also being affected. The payout rates for immediate annuities have fallen by as much as 11% from 2010.

As a result, sales of variable and fixed annuities have dropped substantially from a year ago.

This brings me to the point of this post. It may be in your best interest to delay the purchase of an annuity for at least a year. Hopefully after the election, our government will get its act together and take the actions necessary to stabilize the markets and restore confidence in the economy. If, as a result, the economy begins to grow at a normal rate, the Fed will allow interest rates to rise. Annuity sellers will take note of this, lower their risk projections, and once again begin offering more competitive and attractive rates to retirees.

If you are wondering what to do in the interim with the money you have allocated for possibly buying an annuity,  consider a bond ladder or CD ladder for principal and interest rate safety.

Another option is to build an annuity ladder buy purchasing a series of smaller annuities staggered over time.

Here is a link to an article that discusses the recent trends in annuity payouts: How annuity benefits are shrinking


Comments

  1. Bill Marshall says

    My interest is SPIAs (forget variable annuities — variable ones are just not compatible with a “failsafe” retirement)

    When I analyze the buy-vs-wait decision, the major factors are (1) waiting means I’m older, and the payout amount is higher based on increased age, (2) waiting means tapping the principle to cover living expenses before the delayed purchase which reduces the amount available to purchase the annuity and reduces the payout amount, and (3) waiting means interest rates may be different. If rates stay the same, the negative factor (2) overrides the positive factor (1). So what are the chances of rates being better? Latest Fed statement said “likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.” So if you’re going to wait, be prepared to wait for several years.

    My current plan is to split a SPIA purchase in thirds — one immediately at retirement, one 5 years later, and one 10 years later. I view it as a form of dollar-cost-averaging. At most one will be at the worst possible time. I realize this strategy is counter to the views of Wade Pfau and Joe Tomlinson, http://wpfau.blogspot.com/2012/06/retirement-income-newsbeat-1.html

    The payout rates for SPIAs closely track the Moody’s AAA Bond rate, which is available from the FRB at http://www.federalreserve.gov/datadownload/Output.aspx?rel=H15&series=64d2cda8bbf1712f9ffe7e31238b9618&lastObs=&from=&to=&filetype=csv&label=include&layout=seriescolumn

  2. says

    Thank you for this post. I’m still trying to figure out where I stand on annuities, and whether they will be right for me when I retire. Part of me just has trouble wrapping my mind around putting out all that money and then (but I sure hope not!) dropping dead within a year or so, thus ‘losing’ it all.

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