Annuities to Buy Now and Collect On Later, Maybe Much Later

Annuities to Buy Now and Collect On Later, Maybe Much Later


By FRAN HAWTHORNE

Published: September 9, 2013

ANNUITIES have a long rap sheet. They are expensive. They can tie up investors’ money. They can shackle buyers to current interest rates. They are confusing. And maybe a little boring.

But many investors have become enamored lately with versions called deferred-income annuities, which seem to ease the concerns about cost and interest rates. Still, because buyers wait longer to get their money, these annuities intensify the problems of liquidity and longevity risk.

  
Some financial experts compare these annuities to buying long-term care insurance at a relatively young age.

“They are addressing the primary fear that baby boomers in particular seem to have about retirement, which is that they are going to run out of money before they run out of time,” said Jean Chatzky, the financial expert for AARP.

Although the products are not new, Ms. Chatzky and others who follow trends in personal finance say they are enjoying a growth spurt thanks to the financial crisis, increased longevity and boomers’ growing skepticism about traditional pensions and Social Security. According to Limra, a trade association for retirement and insurance research, sales of the products jumped to $940 million in the first half of this year, from $370 million in the same period of 2012, and nine insurance companies offer them. Still, deferred income remains just a fraction of the $219 billion annuity market.

As with the more traditional immediate (or income) annuities, investors put down cash now to guarantee pensionlike payments for the rest of their lives. The main difference is that traditional annuities start paying within a year, while the deferred versions don’t start paying until much later, even decades down the road.

Moreover, the schedule is flexible. Most providers let customers change the payout date and add more annuities during the lengthy wait, according to Limra.

If the downside is a longer loss of liquidity compared with income annuities, the trade-off is a higher payout.

While there does not seem to be any standard formula and each company sets different rates, Kelli H. Hueler, chief executive of Hueler Companies, a Minnesota-based financial research firm, calculated some examples for comparison. If a 65-year-old man bought a $50,000 immediate annuity, his monthly benefit would be $303. A $50,000 deferred annuity from the same company, bought at age 55 to begin at age 65, would net him $503. For a woman, the comparable amounts are $289 for the immediate annuity and $478 for the deferred. (Women get lower payouts because their life spans are longer on average.)

      
For a further edge, deferred-annuity buyers may be tempted to essentially bet on the direction of interest rates, although financial advisers discourage such thinking. If investors believe that rates will rise, which would improve their payout, they can hold off on buying these annuities, or buy them in stages. After all, the thinking goes, they were not counting on the income right away.

      
Because the annuities are based on timing, a key issue is choosing the optimal age for buying the products as well as the age to start payments.
      
The insurers surveyed by Limra allow customers to defer payouts for anywhere from 13 months to 45 years, and they can start collecting as late as age 95.

     
At New York Life Insurance Company, considered the largest player in the business, and at the Principal Financial Group, based in Des Moines, the typical buyer is in the mid- to late 50s and sets a waiting period of 5 to 10 years. At that age, “It allows you to have a great retirement,” said Matthew Grove, the senior managing director in charge of retail annuities at New York Life. “You can say, ‘Wow, I can go on a cruise!’ ”

      
Other financial advisers focus on later years, with the purchase at age 60 to 65 and payments beginning at 75 to 80.

      
It is relatively easy to live on existing investments for the first years of retirement, but less so later in life, said Stephen M. Horan, co-head of education at the CFA Institute, a trade group for financial professionals based in Charlottesville, Va. “The really difficult thing for an individual is managing the tail-end cash flow, where the outflow is unknown,” he said.

      
Health, family longevity and the amount of other assets available also affect timing decisions.

The products themselves complicate the choice with a dizzying set of variations. For starters, the payouts generally vary by 5 to 10 percent among companies, Limra said. Policies may include cost-of-living adjustments of different amounts. The minimum initial investment can run from $2,500 to $20,000, and there are all sorts of requirements for changing the payout schedule.
      
To help navigate the chaos, Ms. Chatzky recommends consulting an unbiased financial adviser. Ms. Hueler says she hopes to add a chart for comparison shopping to her online annuity platform, Income Solutions, later this month.
      
In any case, financial planners say that people should put just 20 to 50 percent of assets into such a product. “An annuity is only part of an overall plan,” Ms. Hueler said. “People are looking to have an income for life, but there are other goals, like liquidity.”

A version of this article appears in print on September 10, 2013, on page F2 of the New York edition with the headline: Annuities to Buy Now And Collect On Later, Maybe Much Later