Annuities have a mixed reputation, but one variety --
immediate annuities -- have been steadily growing. Does their
increasingly popularity make them right for you, or are there
better ways to build a secure income stream?
Annuity analysis
Most of us avoid
variable annuitiesfor good reason: The income they kick
out to you fluctuates, since it's tied to something like a
stock index.
With an immediate annuity, on the other hand, you plunk
down a big chunk of cash now, and you receive a set sum for a
set period -- possibly the rest of your life. Immediate
annuities aren't cheap, but they're a retirement income
solution worth considering. They sort of let you
buy your own pension.
Sales have been booming...
You wouldn't be alone in considering immediate
annuities. Despite a few ups and downs over the past year or
two, their sales are generally growing, up 30% year over year
in 2008.
New York Life , the leading seller of
immediate fixed annuities, saw an 80% jump in sales during
the first quarter of 2009, according to the publication
Registered Rep.
But should you buy?
Before you jump on the bandwagon, be aware of the
downsides. For one thing, once you buy an immediate annuity,
you're only entitled to the income stream you agreed to. In
particular, if you agreed to a payout for the rest of your
life, and you die next year, the insurance company ends up
way ahead on the deal.
Of course, that can work the other way, too -- if you live
a long time,
you'llend up ahead. With an immediate annuity, a
55-year-old investor in California paying $200,000 can expect
to receive around $1,062 monthly, which comes to about
$12,750 per year.
If you're leery about pursuing an immediate annuity, you
might want to build your own retirement income in a different
way: via dividend-paying stocks. Suppose that hypothetical
investor divided that $200,000 nest egg equally among eight
dividend-paying companies (that's $25,000 each):
Company
CAPS
stars(out of five)
Recent yield
Approximate annual payout
Altria (NYSE: MO)
****
7.3%
$1,825
National Grid
*****
6.8%
$1,700
Eli Lilly (NYSE: LLY)
****
5.7%
$1,425
Southern Company (NYSE: SO)
****
5.6%
$1,400
Diageo (NYSE: DEO)
*****
4.4%
$1,100 Continued... |