Financial Advice for Retirement, Social Security, IRAs and Estate Planning

Strategies for earning high and safe income from Annuities

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The tax-deferral of annuities gets a lot of attention. But not much effort is devoted to the best way to get the highest, safest income from an annuity. Even less attention is devoted to buying an immediate annuity, one that begins paying income within a year.

But you’ll hear more about these issues as insurers look for new sources of income and recent market gyrations turn investors’ thoughts to potential sources of safe, secure income.

Only about 1% of annuity owners choose what is called “annuitization,” which is when distributions from a deferred annuity are made in a series of fixed payments from the insurer. The payments can be made over a fixed term of years, your life, the joint life of you and a beneficiary, or a combination that assures payments will be made for the longer of your life or a period of years. Many annuities have nine or more annuitization payment options.

Many people don’t annuitize because once a payment schedule is selected it generally is fixed and cannot be changed without a big penalty. You will have a steady, secure income that you won’t outlive, but you won’t be able to withdraw additional amounts if you need them. And inflation will cause the purchasing power of the payments to fall each year. That’s why many owners prefer either a lump sum payment or they take periodic withdrawals when they need cash. It also is why many people avoid immediate annuities.

But annuitization, or the purchase of an immediate annuity, can be a valuable part of a portfolio. It produces steady income on which you can depend, and a floor on your income to supplement Social Security. That can be quite a good feeling when the markets are gyrating or are in a long decline. You also won’t have to manage a portfolio, and you won’t be tempted into bad investments and other senior scams because you won’t have access to the money.

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Even better, many insurers now are offering either immediate variable annuities or a variable payment annuitization option.

With a variable annuity payment option (or immediate variable annuity) you choose how the account is invested, and your periodic payments rise or fall with the investment performance. You can change the investment options over time. Obviously, if you took this option four years ago and put the account all in stocks, your monthly income now would be double what it was at the start. But if you started last June, your income might have fallen by now.

Relatively few insurers offer variable payout options now, but the ones that do are the large variable annuity companies. Among mutual funds, Fidelity and Franklin Templeton offer a variable payout option and an immediate variable annuity. Among large insurers, Hartford, Equitable, and American Skandia offer these options.

If annuitizing or an immediate annuity appeals to you, be sure to shop around. Fixed payout rates vary considerably among insurers. If you already have a deferred annuity, don’t automatically select the options offered by your current insurer. Most policies allow you to take the account in a lump sum or transfer it to another insurer. You can shop around for the safe insurer that will give you the best payout, on an immediate annuity, then do a tax-free exchange with that insurer. You’ll not only have secure income, but the highest secure income you could find.

There are many trade-offs in annuitization. You probably don’t want to annuitize your entire portfolio. But if you want a bit more security or a higher floor on your income, the annuity marketplace is a good place to put part of your portfolio.

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