Annuity Life Care Plans

As someone involved in investing for retirement, one of the options that’s fallen by the wayside is the annuity program. Annuities used to be the only life care program available; the creation of Independent Retirement Accounts and Roth IRAs and employer managed 401(k) programs.

When factoring the three variables of Security, Liquidity and Rate of Growth, most annuities are a good mixture of assets and are an excellent asset preservation tool for a retiree.

Annuities are purchased from investment brokers, who take your purchase price and put them into a low-risk investment pool. With several billions in aggregated investments, these can get excellent rates of returns. Most annuities are invested into state and municipal bonds or funds of state and municipal bonds, with some anchored by Treasury bonds. When you purchase an annuity, the investment broker will run through actuarial tables, factoring in your age, your health risks, family status and a bunch of other factors. From the perspective of the investment counselor, the purpose of an annuity is to make a small profit for the company and there are several factors tied into this.

In terms of Liquidity, annuities are not particularly liquid. You’ll get a monthly payment for as long as the annuity runs and that payment will never adjust for inflation. When purchasing an annuity, keep in mind that with a 4% inflation rate (roughly what the US has as an average), prices will double by the rule of 72. Divide 72 by the inflation rate and you’ll find out how long it’ll take for prices to double. This translates to a doubling every 18 years. (As a cross check, if you look at the price of a hamburger now, versus what it was in the late ‘80s, you’ll see that this holds true decently well.) As a result, look at how much the annuity will be paying you towards the end of the term as opposed to the beginning, to get the best utility for your own use.

Annuities tend to have low rates of growth; in fact, they’re not so much a wealth generation investment tool as a tool to disburse your wealth while you’re freed from the hassle of managing it. Most annuities have interest rates to preserve the payments in the realm of 4-6%. This works well for hedging against inflation, but not for generating new wealth from your existing assets. As the final step in getting the benefits of a retirement portfolio, annuities are one of many tools worth considering.

Annuities do have the benefit of being mildly tax deferred. The interest they accrue before they mature isn’t taxable until you start pulling money out of them. Annuities are also worthwhile purchases if you know you’re going to have recurring monthly medical expenses. It’s a comforting feeling to know that your health care each month is covered.

Like all investments, annuities are tools and not panaceas. Carefully weigh all your options when considering one.

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