The Wall Street Journal
Investor – July 27, 2013
Should You Buy Retirement Income?
Insurers Are Marketing ‘Deferred-Income Annuities’ to Baby Boomers Hungry for Pensions. They Might Be Able to Do Better on Their Own
Investment Appeals to Conservative Investors but Can Be Complicated and Carry Hidden Risk
By Anne Tergesen
More insurers are marketing a relatively new breed of annuity to baby boomers hungry for retirement income. But potential buyers might be able to build as good a stream of income—or better—on their own.
The policies are called “deferred-income annuities.” They allow buyers to convert a lump sum into a pension-like series of payouts for life. In contrast to an “immediate” annuity, which starts issuing checks almost instantaneously, a deferred annuity requires owners to pick a start date for payments—typically from 13 months to 40 years or even longer in the future
The pitch: Buy a deferred annuity in, say, your early 50s, and begin monthly payouts—your “pension”—when you retire.
In addition, as with most fixed annuities, you must surrender your principal to the insurer, which keeps the balance when you die. To ensure any remainder goes to heirs, most buyers elect to take a death benefit. But adding such a feature can reduce payouts by as much as 10%, leading policyholders to sacrifice much of the annuity’s advantage.
Comments July 27, 2013
The decision to purchase a deferred annuity or immediate annuity requires some calculations. Critical risks include: you cannot reverse your decision and ask for your money back if you need it – the insurance company owns it, your family is left with nothing if you choose the highest payout and pass away, and inflation can easily destroy a fixed payment that does not increase with inflation.
A 55-year-old man who wants an income of $17,000 a year starting at age 65 can put $150,000 into a deferred-income annuity. His internal rate of return (annual return adjusted for waiting for his payments) based on his life expectancy is approximately 4% before taxes. A 65-year-old man who wants an income of $17,000 a year starting at age 65 can put $260,000 into an immediate annuity. His internal rate of return based on his life expectancy is approximately 3% before taxes.
From 1926-2012, the internal rate of return of large company stocks has been approximately 10% and approximately 6% for government bonds. Can you earn a higher return outside of an annuity and still own your principal? In all likelihood, the answer is yes.
Aaron Skloff, AIF, CFA, MBA
CEO – Skloff Financial Group
Aaron Skloff, Accredited Investment Fiduciary (AIF), Chartered Financial Analyst (CFA), Master of Business Administration (MBA), is the Chief Executive Officer of Skloff Financial Group, a Registered Investment Advisory firm. The firm specializes in financial planning and investment management services for high net worth individuals and benefits for small to middle sized companies. He can be contacted at www.skloff.com or 908-464-3060.