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Carla Fried: Expect to live a while in retirement? Set aside your distaste for annuities

Carla Fried, Rate.com on

Published in Business News

About half of Americans surveyed by the Aegon Center for Longevity said they worry about running out of money in their later years.

If that includes you, it’s time to take a deep breath and with an open mind consider buying an annuity. Not any annuity. We’re in agreement there are plenty of sketchy folks pushing way too expensive and confusing annuity products. But there are straightforward, simple types of annuities that deliver exactly what the worriers need: insurance payouts that will last as long as they do.

A new analysis by the Center for Retirement Research (CRR) at Boston College finds that the insurance protection of basic annuities — guaranteed income if you do indeed live a long time — requires you have less money saved up at 65 than if you were to skip an annuity and rely on your savings to support you.

Annuities are insurance, not investments

In terms of solving lifetime guaranteed income needs, basic annuities are the second best option available. (Delaying Social Security to age 70 takes the top spot, given the higher benefit payout and the embedded inflation adjustment built into Social Security payouts.)

But sort of like your least favorite vegetable, annuities can be hard to swallow. For starters, annuities require a big one-time premium payment. After spending decades building up retirement savings, it can be hard to let go of $100,000, $200,000 or more to generate the guaranteed income stream you want. And there’s the added risk that just a few years after you fork over the premium, you die, effectively collecting only a small fraction in payments relative to the premium you paid.

 

That’s a real risk, of course. In fact, the research team at the CRR at Boston College confirms that annuities are, on average, not a great investment. They find that between 1986 and 2020, for every premium dollar paid, people recoup about 80 cents in payouts.

But that analysis is sort of beside the point. Annuities aren’t an investment. Annuities are insurance protection.

The insurance case for annuities

When we pay the auto insurance premium, the home insurance premium and the term life insurance premium, we do so with the explicit hope we will never collect a penny on those policies. Right? But we have those policies as protection just in case something goes wrong.

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