As a refresher: the immediate annuity is a contract issued by an insurance company that takes a lump sum of money and guarantees a monthly payment based on your current age and your life expectancy and pays it to you for the rest of your life. Even if you have consumed all the money you originally gave them. The major drawback to this scenario is that you have no access to the money, nor does your heirs.
The sales of immediate annuities have grown, mostly due to the public's fear of the recent decline in the stock market. Those who survived the collapse and then the anemic return of the market in the last five years have looked at the seemingly attractive idea of having 'professionals' manage their income stream and bought the immediate annuities willingly. The marketers of these annuities have taken their cue from the noise made by the financial planning community and tried to shave the scraggly beard of the curmudgeon to improve appearances. The face looks more appealing but now the wrinkles are more pronounced.
Consider these "improvements":
- Variable immediate annuities are now available to address the buying-power erosion of fixed income in an inflationary world. The 'variable' component refers to the investment strategy. If your monthly payments are a function of what the investments do, then you could be looking at a reduced payment when you could use even more.
- Similar to the LifeCycle funds in the 401K plans, where the mix of investments moves automatically toward more debt-based (bonds) as you mature, so too, these LifeStages annuities offered by New York Life, address the needs of an aging annuitant, by allowing withdrawals without penalty at three different times in an annuitant's life, at the fifth, tenth or the fifteenth anniversary of the contract. The withdrawal is an acceleration of the monthly payments of up to 30% of the present value of those payments.
- The same contract as above allows for taking future payments in a lump sum and foregoing the payments for the subsequent months until the withdrawal amount has been recovered. For instance, if you needed a lump sum for taxes or some large expense in the amount of $3000 and you were receiving $300 per month from the contract, you would not get payments for 10 months until your advance was repaid.
- You can hold back up to either 25% or 50% of your lump sum investment in a segregated account made payable to your heirs if you are willing to take a lower monthly payment in exchange.
Of course, we know that none of the above 'improvements' are free! Each of them has a cost. And those costs can be very expensive. For instance, the price of the choice to hold back up to 25% or 50% of the lump sum can reduce your monthly payment by 10% to 20%.
If that is not a problem, then the product may be appropriate for you. But the same caveat applies: once you create the immediate annuity, you have given your asset to the insurance company and other than above, you or your heirs cannot get it back. If this retirement income strategy would consume all your liquid assets, you are not a candidate for this type of program, with or without the 'improvements'. Consider doing this with some, but not all, of your assets if you fear that you cannot be comfortable with the investment guidance of your advisors or if you are currently doing it yourself. Even having some assets in a no-frills CD is better than having no free access to any of your hard-earned cash.