- The first is flexibility. Once you give your money to an insurance company you usually can’t get it back (although some will let you take a one-time withdrawal for emergencies). That’s the reason most planners recommend investing no more than 25% to 30% of your savings in an annuity.
- The second is that payments usually aren’t adjusted for inflation. You can buy an annuity with an inflation rider, but it will lower your initial payout by about 28%.
- The third — and most significant — drawback is that low interest rates will depress your payouts, effectively making annuities more expensive now. Payouts are usually tied to rates for 10-year Treasuries, which are at a record low.
Even with that caveat, annuities might still deliver a better return than you’d get by investing in fixed-income investments, because the longer you live, the more you receive. That’s because annuities also provide mortality credits, said Harold Evensky, a certified financial planner in Coral Gables, Fla. When you buy an annuity, the insurance company pools your money with that of other investors. Funds from investors who die earlier than expected are paid out to the other annuity holders.
One option if you think interest rates will be headed up is to create an annuities ladder. Instead of investing the entire amount you want to annuitize at once, spread your investments over several years.
For example, if you want to invest $200,000, you would buy an annuity for $50,000 this year and invest another $50,000 every two years until you have spent the entire amount. That way, the payouts will gradually increase as you get older, and if interest rates rise, you’ll be able to take advantage of them.