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Retirement Risk for Women: Oversold Immediate Annuities

Selling immediate fixed annuities to women retirees these days is about as hard as leading bears to honey. The combined impact of the market crash of '08 and the growing drumbeat of longevity risk warnings has given women a heightened awareness (if not low-grade fear) of outliving their money in retirement. That's a golden opportunity for insurers who are quick to point out they have the perfect product to allay those concerns: a fixed immediate annuity that will make lifetime payouts. The concept is indeed sound, but the timing presents a retirement risk for women. Buying an immediate annuity right now and locking in a payout tied to today's record-low interest rates isn't exactly smart. But that hasn't slowed down the insurers.

New York Life Insurance crowed in a recent press release that it was the "number one seller of fixed immediate annuities for women in 2009, with 64 percent of its record $1.9 billion in sales going to women purchasers." To help make the case for immediate annuities, New York Life cannily slid in a reference to an academic paper-from a Wharton prof no less-discussing the value of Lifetime Income for Women. (PDF).
Immediate Annuities: Good Idea. Bad Timing
In moderation, immediate annuities are in fact a very compelling investment for retirees looking to lock in a guaranteed income payout. It's just that now's not exactly an ideal time to make the purchase. Morningstar's Christine Benz recently had a great post on the annuity timing trap:

If you buy an annuity today, the currently ultra-low interest-rate environment will depress the payout you receive. (It's not a perfect analogy, but it's somewhat akin to buying a long-term bond with a very low coupon. Rates may go up in the future, but you'll be stuck with your low payout.)
Immediate Annuity Buying Tips
If you're considering purchasing an immediate annuity today, consider these strategies:
  • Wait For Interest-Rates to Rise. Don't lock in at today's low rates. Financial advisor Harold Evensky, told Morningstar's Benz he would wait until the long-term bond rate works its way back to the 5 percent range before getting interested in an immediate annuity.
  • Dollar Cost Average: Don't fork over all the money you plan to annuitize in one lump sum today. If you have $200,000 you want to annuitize, purchasing four $50,000 policies over the next four years would provide some protection if rates, as anticipated, do start to rise. Use different insurers for each chunk and you will also add some important risk diversification in the rare event any single insurer runs into trouble; state insurance guaranty funds typically provide at least $100,000 of protection per insurer.
Related Articles on MoneyWatch:
Five Rules for Immediate Annuities
Good and Bad Reasons to Pass up an Immediate Annuity
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