Single premium immediate annuities have become more popular as a tool for generating lifetime retirement income. However, immediate annuities are insurance policies that do not make sense for everyone, despite the appeal of having income security. Two circumstances come to mind when you should probably not buy one.
The second circumstance when buying an immediate annuity is probably a bad move is when your basic retirement income needs are met by other guaranteed income sources. For example, if you have a secure pension and Social Security income that will pay your living expenses, paying for the insurance of an immediate annuity is overkill. There is no reason for you to incur the sales costs or to surrender access to the premium amount because the risk is not there.
Even if you do not have sufficient pension or Social Security income (the typical guaranteed retirement income sources), you still don’t need to buy an immediate annuity if you have other ways to generate a secure retirement income.
For example, assume that you are 65 and determine that you will need $40,000 per year in retirement income to meet your basic needs. Further assume that you will receive $20,000 in annual Social Security income. Therefore, you need to find another $20,000 in annual retirement income to meet your needs.
Now let’s consider the options if you have $1,000,000 retirement nest egg to work with. You can buy a basic single life immediate annuity at today’s rates for about $290,000. Or, you can apply a very safe withdrawal rate 0f 3.0% to your nest egg from which you can reasonably expect to receive a lifetime income of $30,000 with annual inflation adjustments. You don’t need to buy an annuity.
The bottom line is this: Annuities can be a helpful tool to secure your retirement future if (a) the purchase doesn’t actually reduce your security or (b) you already are income secure.