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Dooley: Annuities offer some protections, but come at a cost

If you are retiring soon and looking into your options to structure the distribution phase of your life, annuities are an option to consider. Annuities, simply put, help you ensure that you’ll have enough income to last a lifetime.

Annuities are contracts offered by insurance companies that pay a stream of monthly payments in exchange for a premium. An immediate annuity is one in which you receive payments right away. A deferred annuity is one where you buy a contract but don’t receive payments until after a set period of time.

There are many different types of annuities. Some of the most important differences between them have to do with the length of time over which the payments are made and whether they are fixed rate or variable rate.

With respect to the length of time, among the most important annuity types are:

• Lifetime annuities, which make payments until the annuitant dies.

• Joint and last survivor annuities, which make payments until the second of two people dies.

• Period certain annuities, which offer a payout guaranteeing the annuitant or their beneficiaries will receive income for at least a minimum period, typically 5, 10 or 20 years, referred to as period certain.

While annuities reduce the risk that you will outlive your savings (and suffer a drop in your standard of living), they do so at a cost. They reduce the amount of money you have available for precautionary savings and bequests. Additionally, they are not liquid – once you have bought one, it can be expensive or impossible to change your mind later.

For this reason, using a portion of your savings to buy an annuity may be most attractive when:

• You (and your spouse) expect to live for many more years – good genes.

• You have relatively low income from other sources (e.g., from defined benefit pension plans).

• You are relatively more averse to risk.

So, should you buy an annuity? Whether the amount of the annuity is right for you – or even if you should annuitize – involves a lot of issues, such as your other assets, savings, income and taxes. If you’re only taking care of yourself, the lifetime payment option might be a good choice. If there are other people counting on the income, you’ll want to look into the other options.

Regardless of your decision, here are three key factors to keep in mind:

• Comparison shop: Payment rates will differ significantly from insurer to insurer. Look carefully at the fees and expenses. Examine the rates and terms they offer.

• Find a reputable company: Investigate the stability and financial strength of the companies you are thinking of buying from. You expect them – and need them – to be in business for a long time. I call it marrying the contract. Consider it permanent.  

• Watch for additional costs: At their core, immediate annuities are a very simple product, but extra features come with additional costs. Be sure to read through the fine print.

Happy planning.

• Timothy J. Dooley, CFP, is president of Comprehensive Retirement Resources Inc., an independent firm at 201 N. Draper Road in McHenry. He can be reached at 815-578-4217.

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