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Thinking of buying a immediate annuity, I want to hear why this is not a good thing to do.

Another reason: it is possible to obtain a cheaper (no fees), safer (guaranteed by US government) annuity and it comes with inflation protection to boot. You can obtain it by delaying your Social Security Benefits until you reach age 70.
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Annuities are an illiquid insurance product. Setting expectations is an important step.

They can fit with some financial plans. Committing over 30% of your assets to annunities is not a great idea. States have some coverage in case the insurance company fails but the coverage limits for annuities aren't very high.
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"Thinking of buying a immediate annuity, I want to hear why this is not a good thing to do. "

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An immediate annuity has something to offer - but be certain you know what you
are buying and how much you are paying.
Annuities payout is based on current interest rates - and interest rates are rather
low right now.
Also, annuity payout is based on your current age.

Howie52
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Thinking of buying a immediate annuity, I want to hear why this is not a good thing to do.

You're paying an insurance company to manage a pile of money for you. You are paying some fees and giving up some potential returns in exchange for the certainty of getting a fixed amount of money every month for the duration of the annuity, typically your life.

This is a bad idea for most people.

1. If you can follow a simple recipe, you can manage that pile of money using a simple index fund strategy (such as the "Couch Potato Portfolio") and have larger payouts than the annuity is promising. See also "The Retire Early Home Page" for additional info.

2. If you need access to a lot of that money all at once, the fees for getting it back from the insurance company are typically extreme.

3. The earnings from an annuity are taxed as regular income. Long-term capital gains and qualified dividend income have lower tax rates.

An annuity might still be a good idea if you are buying the annuity for someone who cannot or will not follow the recipe. (And that could be you, too.) The beneficiary may have dementia or other mental illness. The beneficiary may not be emotionally stable enough to stand back during a stock market crash. (How did you do in 2008?)

Some people make the emotional decision to prioritize the security of guaranteed payments over the possibility of larger payouts. This is not a financial decision.

Also, this need not be an either/or decision. You can buy an annuity with some of your money and continue to manage the rest yourself.

We might be able to provide more targeted advice if you explain more about why you want to do this.

Regards,

- HCF
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Just for clarification, are you talking about a single premium immediate annuity?
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Some people make the emotional decision to prioritize the security of guaranteed payments over the possibility of larger payouts. This is not a financial decision.

It is an emotion based financial decision.
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1. If you can follow a simple recipe, you can manage that pile of money using a simple index fund strategy (such as the "Couch Potato Portfolio") and have larger payouts than the annuity is promising. See also "The Retire Early Home Page" for additional info.

The risk is low but there is risk. Whether the pullback occurs in the first year or 5 years later makes a lot of difference.

2. If you need access to a lot of that money all at once, the fees for getting it back from the insurance company are typically extreme.

Which is why in most cases it isn't a good idea to put most of your funds in an annuity.

3. The earnings from an annuity are taxed as regular income. Long-term capital gains and qualified dividend income have lower tax rates.

The payout is treated a combination of premium and earnings. The part that is deemed premium isn't taxable.
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Keep in mind that immediate fixed annuities are commodity products. Every insurance company and many financial institutions sell them. It's easy to get multiple quotes and compare. Don't forget to get quotes from discount brokers like Fidelity, Vanguard, T Rowe Price, and TIAA-Cref.

The people who sell them will often try to steer you into more complex products. Like variable annuities. Stick with the basic plan.

Most pay for life, but leave nothing for your heirs on your death. Some buy fixed term annuities to guarantee a minimum number of payments--guarding against early death.

We have an annuities discussion board which mostly links what others have said about them.

No inflation protection. So best to keep most funds in equities as long as you can. And then perhaps buy a series of annuities over time to increase your payout.

Check the rating of the issuer usually in AM Best. Don't be surprised that most of them are repackaged/relabeled from a handful of companies that issue them. You want a company that is financially strong and likely to be around long term. They are not insured. The industry claims no one ever failed to get paid, but that is usually because failing companies are bought out by other companies usually within their state. They are regulated by state insurance agencies.

Prices depend on interest rates. Low interest rates make them more costly to buy.
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HaltCatchFire is already one of your Favorite Fools.

Minxie
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HaltCatchFire is already one of your Favorite Fools.

Minxie


Aww! You made my day. Thanks!

- HCF
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Thinking of buying a immediate annuity, I want to hear why this is not a good thing to do.

Another reason: it is possible to obtain a cheaper (no fees), safer (guaranteed by US government) annuity and it comes with inflation protection to boot. You can obtain it by delaying your Social Security Benefits until you reach age 70.
Print the post Back To Top