Fixed-Rate Annuities Annuities have been around for over two thousand years. In Roman times, they were called annua, or annual stipends. In return for a lump sum payment, these contracts promised to pay buyers a fixed yearly payment for life; sometimes for a specified period. Annuities have been available for over two centuries in the U.S. In 1812, the Pennsylvania Co. for Insurance began selling annuities and life insurance. Fixed-rate annuities are often compared to government securities since both provide guarantees.
Fixed-Rate Annuities vs. U.S. Government Bonds Annuity
Bond
Annuity
• Can avoid taxes during life
• No reinvestment risk
• Tax-advantaged income
• No market risk
• No broker cost to buy or sell
• No interest rate risk
• Free-look period
• No bid-ask spread concerns
• At death, probate avoidance
• Possible creditor protection
• Tax-deferred growth
lic at
e
• Principal always guaranteed
Bond
D up
Annuities are the only investment vehicle with guaranteed lifetime income. In return for lifetime income, the investor gives up principal in return for monthly or annual income; the shorter the life expectancy, the higher the payments. Converting an annuity to guaranteed lifetime income (annuitization) also means tax-advantaged income. For a male age 70, for every $9,000 received, only $2,610 is taxable (an exclusion ratio of 71%).
2011 Annual Lifetime Income from a $100,000 Immediate Annuity 55
60
male
$6,500
$7,100
female
$6,100
$6,500
m&f*
$5,800
$6,100
65
70
75
80
85
$7,800
$9,000
$10,400
$13,000
$15,900
$7,300
$8,100
$9,400
$11,800
$14,700
$6,600
$7,300
$8,200
$9,800
$12,500
N
ot
age
* both spouses are same age; payments remain level as long as either spouse is alive
D
o
An annuity can be structured so that each year the income stream is adjusted by inflation (CPI). As the table below shows, this is not usually recommended since payments are initially 39% lower (e.g., female age 55: $3,700 vs. $6,100 w/o CPI).
2011 Annual Lifetime Income from a $100,000 Immediate Annuity [With Annual CPI Increase]
age
55
60
65
70
75
80
85
male
$4,400
$5,100
$6,000
$7,000
$8,800
$10,500
$13,200
female
$3,700
$4,200
$4,900
$5,800
$7,200
$8,800
$11,300
Projecting life expectancy can be important when deciding whether or not lifetime annuitization (income) for a portion of one’s portfolio should be considered. Assuming average or better-than-average health, the older the investor, the more an immediate annuity makes sense—if there are no heirs. Someone younger than 65 should also look at other income-generating methods, such as a systematic withdrawal plan with a balanced (stock/bond) mutual fund.
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