When an Immediate Annuity May Not Make Sense

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.

First, if a retiree has very little retirement savings, buying an immediate annuity can make things worse, not better. If you use most of your savings to buy an annuity, you may not have an adequate cushion to cover those unexpected expenses. These expenses could relate to your health or even something as mundane as needing to replace your roof. With a typical single premium immediate annuity, once you have paid that premium, you cannot get your money back, except over time in the form of the contracted-for monthly payments. There is no hardship exception.

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.


  1. says

    Help please? I’m stumped. and work and taking care of elder Mom leaves little time to get educated. . . .
    I must work until March 2014 to get full SS at age 66. By my uneducated guess, I’ll need to augment my SS with ~$1,200 per month from another source. I have some savings and a 401K totalling ~$170K, but my dilemma concerns my ladder of 10 IRA CD’s. Right now each is ~$18,000, and they’re staggered to mature at 12/2012, 3/2013 and others each year in December and March through 13/2017. Now I’m not so sure this was a great idea because maybe it would be better to have everything in one basket at some point so I can figure out how to draw from???? (Note that I have zero “risk tolerance”!)
    So, should I continue rolling over each one for another 5 years? Or, should I start backing-off the terms as each one matures to eventually have them all mature in at least the same year?….2017 would mean I’d have to draw from savings or 401K money for the first three years of retirement.
    Can you pleeeeeeze point me in some logical direction?!?!!?!!?
    Thank you!!!

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