"Get Your Finances Ready for Retirement"-A Look at Immediate Fixed Annuities
Monday, January 05, 2009SUSIE GHARIB: Investors are looking for alternatives to stocks, especially these days after the markets performed miserably in 2008. One option many retirees are considering is an annuity. So for the next two Mondays, we'll road-test various types of annuities. Joe Collum kicks things off in tonight's "Get Your Finances Ready for Retirement" with a look at immediate fixed annuities.
JOE COLLUM, NIGHTLY BUSINESS REPORT CORRESPONDENT: Abe Novogrodsky is 96 years old and going strong still working six days a week coordinating services at a Miami synagogue and he expects to maintain his daily routine for as long as possible.
ABE NOVOGRODSKY, BETH DAVID CONGREGATION: I'm in pretty good health. I take care of myself. I exercise. I read. I'm active.
COLLUM: Because he still holds a job, Novogrodsky says he doesn't have to worry about his finances. But as Americans live increasingly longer lives, one of their big concerns is that they'll outlive their retirement savings. One possible solution is to buy an annuity. In essence, when you buy an annuity, you turn over a lump sum of money to an insurance company. You then get a series of checks over a certain amount of time or for as long as you live -- providing you with a guaranteed stream of income. In fact, author Kerry Pechter says buying an annuity is the equivalent of creating your own private pension plan.
KERRY PECHTER, AUTHOR, "ANNUITIES FOR DUMMIES": Most people do not have defined benefit pensions and they have to create their own form of a lifetime guaranteed income and one way to do that, the primary way to do that, is simply to buy annuity.
COLLUM: There are various types of annuities, but Hugh McHaffie of John Hancocks wealth division, which sells annuities, says the simplest and most common is the immediate fixed annuity.
HUGH McHAFFIE, JOHN HANCOCKS: If you provided a million dollars to us, we will guarantee you a string of income of $50,000 no matter how long you live. And that guarantee's backed by the full faith and credit of the insurance company.
COLLUM: Maria and Leonel (ph) Rojas of Cooper City, Florida, were looking for lifetime financial security when they each bought immediate annuities last year.
MARIA ROYAS, RETIREE: I will still get the same income for whatever many years I live, 20, 30, 50. I'm planning to live long.
COLLUM: They bought their immediate annuities on the advice of certified financial planner Richard Akirmaian. He says Mrs. Rojas's plan will pay her at a rate of about 8 percent per year for 15 years or life, whichever lasts longer. If she dies after, say, five years, her annuity will pay her beneficiaries for the remaining 10 years. But many immediate annuities simply stop paying when the holder dies leaving nothing for survivors. An immediate annuity does not go up and down with the stock market and Professor Meir Statman says while that can provide peace-of- mind, some people have a hard time giving up potential gains.
MEIR STATMAN: When you have a million dollars worth of stocks in your portfolio and you convert it on one day into an annuity, the next thing that happens for sure is that the stock market zooms just to spite you and you feel horrible.
COLLUM: And there can be other downsides because the payments on fixed immediate annuities never change. Over 20 or 30 years, inflation will eat away at their purchasing power. If inflation protection is offered, it will cost extra. Also, immediate annuities often carry high surrender fees and that can be a problem if the holder needs to cash in early in order to meet a medical expense or other emergency. For that reason, if you don't need the money unless you live past a certain age, a better option may be a deferred immediate annuity or longevity insurance. These offer the same types of lifetime income as a regular immediate annuity, but don't begin paying out until some time in the future. Before buying any annuities, it's important to shop around for the best fees, payout rates and guarantees. And it's also important to consider the financial stability of the companies making those guarantees by checking their ratings. Joe Collum, NIGHTLY BUSINESS REPORT, Miami.
GHARIB: Next Monday, we'll look at the pros and cons of variable annuities as we continue to "Get Your Finances Ready for Retirement."
