Is An Annuity Right For You?


by Selvin Gootar

When you talk about your retirement strategy and you mention annuities you’ll find that people praise or damn them. “But for those nearing retirement, and especially for those 70 or older, they can provide a much needed, dependable income stream.” That’s the view of Harold Evensky, chairman of Evensky & Katz/Foldes Financial in Coral Gables, Florida, an investment advisor with over 35 years in the business.

Harold Evensky via LinkedIn
Harold Evensky via LinkedIn
“Low-cost variable annuities,” according to Evensky, “may be a viable investment vehicle for those in a moderate to high tax bracket who expect to have a long accumulation period and a long distribution (i.e., withdrawal) period.”

As part of a retirement portfolio for 70 plus people, the certified financial planner favors immediate annuities, which he says “offer the unique advantage of a guaranteed lifetime income and the potential for a mortality return.”

This means that when determining the payout on an immediate annuity, the insurance company estimates the average age of death of the investor group, for example women age 70. The insurer then takes the funds collected, deducts its operating cost and profit, and pays out the balance based on its estimate of the number of years until the “average age of death.”

If you die before you reach 85 the payout ends. But if you live beyond 85 the payments continue and you defy the insurance company’s odds. You, in a way, get a bonus.

This is the “mortality return.” But Evensky cautions that “as the payout is dependent on current interest rates, it may make sense to delay until rates return to historical norms.”

Annuities get a well-deserved bad rap because in many cases, they are inappropriate for certain investors. In addition, they come with high commissions, often high fees and questionable sales tactics used by some in the industry.

Still, they have an undeniable appeal. Who wouldn’t be interested in “a lifetime of retirement income,” the phrase used in ads from insurance and financial service firms to market annuities. The figures don’t lie. In 1994, Americans purchased $99 billion worth of  fixed and variable annuities, according to LIMRA, an insurance trade association in Windsor, Connecticut. Twenty years later, that figure ballooned to almost $240 billion.

 The question remains whether an annuity is right for you, and whether it fits into your retirement strategy.



You basically get an insurance contract that offers monthly or yearly income in exchange for periodic payments, or one lump-sum payment.

Depending upon the type of annuity, you begin to get income in five, 10, or 20 years, or immediately. Your money earns a certain rate of return each year. When you convert your account into a monthly income stream, called annuitization, you receive funds for a specific number of years, or for your lifetime.

The types of annuities being offered have expanded in recent years, but six kinds stand out:

Fixed – This is similar to a bank certificate of deposit. It provides investors with a specific, or fixed, rate of return over a certain period of time.

Variable – A variable annuity offers fluctuating rates of return. Investors select baskets of investments, called subaccounts, managed by mutual fund firms. In a stock subaccount, for example, your money rises or falls depending on the value of the stocks held in the subaccount. You should hold this type of annuity for at least 10 years. If sold sooner, expenses will eat away at your returns.

Equity-indexed or fixed-index – This is an exotic spin on a deferred annuity that links returns to stock-market indexes.  Sellers say they offer little risk but tremendous upside potential. The idea is that if stock prices go up, you make money. But if the market goes down, you’re guaranteed not to lose money. A number of financial professionals have raised concerns about this type of annuity.

Immediate – Immediate-payout annuities offer instant cash flow. You give a set amount to an insurance firm and then receive monthly income for a fixed number of years or for a lifetime. The payout is determined by how much you invest, your age and, importantly, interest rates at the time of purchase. Today’s interest rates are historically low. This is the most straightforward type of annuity. But you also have to decide if payments will end at the time of your death in a single-life annuity, or if you want lifetime income for your spouse in a a joint-and-survivor annuity, which is more costly.

Deferred-income – Also called longevity annuities, investors pick an income start date 15, 20, or 25 years in the future. For example, you can buy one at 55 or 60 but it won’t pay out until you’re 75 or 80. The risk is that you won’t live to collect, but if you do, the cash flow can be significant.

Qualified Longevity Annuity Contract (QLAC) – This is a variation on the longevity annuity, but with an added benefit: The annuity is funded with qualified retirement money. As a result, you can avoid taking a portion of the Required Minimum Distribution (RMD) from an IRA or 401(k) by investing 25 percent (up to $125,000) in a QLAC. The money doesn’t go toward the IRA or 401(k) distributions that retirees must begin taking at 70 ½. So you’re delaying the RMD (and taxes), although you must start taking these payments at 85. (The longer you wait, the more you’ll get.)  


How long is the holding period? Avoid cashing in the policy early so you don’t get hit with surrender charges.

Be aware of front-end or annual maintenance fees.

Don’t invest more than 10-20 percent of your portfolio in an annuity.

Research the company selling the annuity. Will it be able to make the payments 20 or 30 years from now? Since 2009, only six firms licensed to sell annuities have gone belly up, and most were small companies. But still, do your due diligence.

Research the salesperson. If the individual is registered, check to see if he or she has any kind of employment or disciplinary history. You can call FINRA Broker Check at 800-289-9999.

Be wary of  titles like Certified Senior Advisor or Certified Retirement Financial Advisor. People often get these designations after a few days of classroom instruction or through independent online study. More rigorous credentials include Certified Financial Planner or Chartered Financial Analyst.

Tax deferral is an attractive feature for annuities. No taxes are due on earnings that build up inside a contract until withdrawals are made. But keep in mind that annuities are taxed as ordinary income, not at the more favorable capital gains rate, such as with mutual funds or exchange-traded funds.

Consider the inflation factor. If you purchase an annuity, you might want to buy one that’s adjusted for inflation and that means initial payments will be lower.

Annuities aim to keep an income stream flowing throughout your life and ensure you don’t outlive your savings.

The established investment nest-egg scenario – a pension, IRA or 401(k), Social Security, and non-retirement savings – remains the optimal one. An annuity may or may not be an effective complement to your plan.

Cost, prevailing interest rates, and permanently surrendering a portion of your assets has to be factored into the equation. Everyone’s comfort level is different.

Let me know what you think. 



Selvin-Gootar-linkedinSelvin Gootar is an editor and writer specializing in business and personal finance. He lives in Sunnyside Gardens, NY.