Don't you wish you were entitled to a traditional pension when you retire, just like Dad or Mom?
Unfortunately, many such pensions, defined benefit plans that provide income for life upon leaving the workplace, no longer exist or have been sharply reduced.
You might, however, just be able to create your own.
With the demise of the traditional pension in favor of 401(k)s and other employee savings plans, the uncertainty surrounding future Social Security benefits and persistent, modest stock market returns following the outsized profits of the 1990s, the financial industry is offering a fix: the immediate annuity.
During the go-go '90s, when annual stock market returns of 20% or more were common, some retirees got accustomed to withdrawing as much as 8%-10% from their investment assets each year for living expenses.
Now, with the average investment return dampened, most advisers recommend drawing down no more than 4%-5% a year, says Drew Demming, a second vice president of retirement income management at
The Principal Financial Group
, which provides immediate annuities to employees of Fortune 500 companies and to mutual fund giant Fidelity Investments.
"People are having to recalculate their withdrawal rates," he says. "People now see the economic value of an annuity."
The immediate annuity, also known as an income annuity, is an insurance contract that offers regular income for life in exchange for a sum of cash. It is not to be confused with the deferred variable annuity, another insurance industry offering that has been justly criticized as a costly, oversold product that almost no one but the wealthy need consider.
In its most simple form, the fixed immediate annuity would work like this. A 67-year-old who contributes $100,000 in after-tax dollars to an immediate annuity starting Dec. 1 of this year would receive $718.90 a month for the rest of his life, according to an annuity calculator at the Vanguard Group's Web site (
The value of the monthly payment is based on age, gender and the amount contributed. The older the person, the higher the payment.
Many in the industry view the immediate annuity as the answer to that worrisome question -- will I outlive my money? And for large financial institutions, such as Vanguard, Fidelity and TIAA-CREF, that manage retirement savings accounts for millions of investors, immediate annuities offer a way to hold on to that money rather than let it walk out the door upon retirement.
But seniors aren't flocking to them, as expected, with the kind of gusto associated with an all-you-can-eat buffet. Only about $12 billion in income annuities were sold last year, far short of the potential market, according to the insurance industry.
Half of the people in the U.S. between 50 and 75 with household assets of $50,000 or more will need to tap into savings during retirement to pay for basic living expenses, according to a recent study by LIMRA, a Windsor, Conn. association that provides research to the life insurance industry. Almost half of them are interested in converting some of their savings into guaranteed lifetime income.
If all those individuals eventually annuitize a portion of their assets, estimates LIMRA, the amount could exceed $220 billion.
John Ameriks, a senior research analyst with the Vanguard Group, which last year began offering immediate annuities through insurance giant
American International Group
, or AIG, agrees there's a vast untapped market. There's just one not-so-small problem.
"It's not that the tools don't exist," he says. "It's that people don't buy them. People fear the loss of liquidity. They also fear dying the day after signing."
Ameriks says it's understandable that people are reluctant to part forever with a chunk of their savings. But that's the trade-off for getting guaranteed income for life.
He predicts that eventually people of retirement age will catch on to the idea that they don't have to annuitize all their savings to help make their finances more secure, and that they can take out different annuities at different stages of retirement.
"This notion that one day you're working and the next day you're on the beach is going the way of the dodo," he says. "It's not now or never."
(Vanguard spokesman John Woerth says the civil complaint filed last week by New York State Attorney General Eliot Spitzer targeting
Marsh & McLennan
AIG and other insurers and brokers does not affect the Vanguard's immediate annuity program with AIG. The complaint and the guilty pleas by two AIG executives related to bid-rigging involve the corporation's casualty division, not its life insurance company, he notes. The investigation has not affected the insurer's high ratings for financial strength, Woerth adds.)
Some financial advisers caution, however, that now might not be the time because of historically low interest rates. Just as homeowners are locking in the lowest interest rates in 40 years, those who are purchasing annuities are stuck with the same interest rate fundamentals.
Also note that not all immediate annuities are alike. With a fixed immediate annuity, the regular payout does not change. But some products offer a graded payment option that allows for a gradual increase.
An alternative is a variable immediate annuity, whose payments change depending on the performance of the underlying stocks and bonds chosen. This option carries the potential for greater risk, as well as greater reward.
Many annuities let the purchaser choose whether to have the annuity pay throughout his life or his life and that of a survivor.
Two years ago, Principal Financial rolled out a new, highly flexible immediate annuity called the Principal Income IRA. The idea is to transition a retirement savings account into a retirement distribution account.
Account holders can choose to do one or more annuity with a variety of features: cost-of-living increases, survivor income, income for caregiving, income for heirs or charities, and a liquidity reserve. Each feature, of course, lowers the cost of the monthly income the annuitant receives, which is a targeted estimate based on a computer simulation of the performances of the underlying investments.
In the same way that investors with a large sum of cash have been advised to "dollar cost average" it into the stock market, or put portions into the market over a period of time, rather than sink it all in at once, so retirees should think of "benefit cost averaging" their annuities as interest move up and down, suggests Demming of Principal Financial.
While response to the company's immediate annuity product has been mixed, Demming says the accounts that have been opened are twice the amount of what was expected, about $400,000 each.
It turns out, he says, that higher-net-worth individuals are "looking for a floor" and using them as a "Social Security supplement."
When shopping for an immediate annuity, the first priority should be the credit-worthiness of the insurer. "The insurance company has to be around longer than you," says Ameriks. Check for top-of-the-line ratings from A.M. Best, Standard and Poor's, and Moody's. (Both AIG and Principal, for instance, are highly rated.)
Then use online sites, such as
www.fidelity.com, for information and free quotes. Compare quotes from like-rated companies, and on a simple fixed-rate immediate annuity, look for the highest monthly payment.
Before joining TheStreet.com, Ann Perry was the personal finance columnist for The San Diego Union-Tribune. She is the author of "The Wise Inheritor: A Guide to Managing, Investing and Enjoying Your Inheritance" (Broadway Books, 2003). She has a B.A. in English and Communications from Stanford University and a master's degree from the Columbia University School of Journalism. She can be reached at