Annuities with New Promises
Immediate
annuities have always been a reliable source of lifetime income for retirees.
But that guaranteed paycheck has its downsides: The fixed payouts don't rise
with inflation, and you can't gain access to the principal once you hand it
over to the life insurance company.
Now dozens of insurers are offering a new
way to get lifetime income, but with opportunities to cash out and for payouts
to increase. These products with "living benefits" are actually
variable annuities with income guarantees. You can diversify among stock and
bond funds, and you can withdraw 5% to 6% of your initial investment every
year.
There are two major types of living
benefits. With a guaranteed minimum-withdrawal benefit, you can withdraw money
at 5% or 6% annually for the rest of your life, no matter how your investments
perform. If your investments do well, you can cash out your balance, although
you may have to pay a surrender charge.
A guaranteed minimum-income benefit also
allows you to withdraw 5% or 6% annually, but only until you convert your
account to a lifetime stream of payments. Once you annuitize, your payments are
based on no less than the value of your original investment, regardless of
market performance.
David Schechter, 71, a retired computer
consultant in Wilmette, Ill., is a convert to living benefits. He
and his wife, Irene, 67, first bought immediate annuities, but worried that
fixed payouts wouldn't keep up with inflation. They then turned to
living-benefit products. "When the stock market is like a roller coaster,
I'm comforted by the fact that not one cent of my deposited funds is actually
at risk," he says.
How to Shop
Choosing a living-benefit product can be tough because each insurer offers its
own twist. Also, these products are pricey -- you pay extra for the income
guarantees, along with the costly, standard variable annuity fees. Seek expert
advice to decide whether one of these products is right for you. Mark Cortazzo,
a certified financial planner with Macro Consulting, in Parsippany, N.J.,
recommends that you:
Compare fees. The products Cortazzo likes charge about
0.55% of the account balance per year for the guaranteed income benefit, plus
1.4% for the standard fee. Some companies tack on death benefits, which you
don't need if your goal is to maximize lifetime income.
Shorten the surrender period. These annuities generally let you
withdraw at least 5% of your account balance every year without paying a
surrender charge. But many companies will try to sell products that levy up to
7% of your balance if you cash out within seven years. Instead, ask for the
same annuity with a four-year surrender period or no period. These products may
charge just 0.1% extra for a four-year period, or 0.15% to eliminate the
period.
Study the withdrawal amount. Depending on how the insurer calculates
your benefits, a product that lets you take withdrawals of 6% a year may be
better than one that lets you receive 7%. Some base your withdrawal on your
original investment, while others let you increase withdrawals if your
investment value rises -- letting you take 6% of a balance that has grown to
$120,000, rather than 7% of an original investment of $100,000.
Cortazzo prefers the guaranteed
minimum-income benefit over the withdrawal products. You can't cash out once
you annuitize, but your payouts at that point tend to be higher. The guarantee can be worthwhile because their retirement
savings would suffer if they started withdrawing in a down market. Those in
their seventies and older might do better with an immediate annuity.