Annuities may not offer as much monthly income per dollar invested as they used to, but that doesn’t mean that retirees should totally discard them from their investment portfolios.
That’s the advice offered by MarketWatch, which suggested that the retirement-planning products that have long occupied insurance companies’ stables shouldn’t be put out to pasture just yet.
“For people who want steady income, and want safety, annuities have usually been pretty good,” planner Chris Chen with Massachusetts-based Insight Financial Services told the publication. “But with interest rates pushing to zero, there isn’t that much advantage anymore.”
Historically, insurance companies were able to pool savings of many clients invested in annuities, and were able to offer solid monthly incomes based on average longevity. But with collapsing inflation and interest rates that have declined over the decades — yields on AAA-rated corporate bonds have plunged from nearly 10% in 1990 to 3% today, MarketWatch noted — payouts have gotten much lower.
To address the current annuity crunch, retirees might want to consider putting off buying the products until they’re further along in life. Todd Geising, annuity research director for the Secure Retirement Institute, noted that buyers of single-premium immediate annuities today have an average age of 72, and many are even older.
The older a consumer is when they purchase an annuity, the less interest rates factor into payouts, and the more dependent they are on people’s remaining life expectancy. Those who hold of on buying today may also benefit from a future rise in interest rates, though Geising noted that there’s no guarantee of that happening.
So what can retirement investors do to support themselves before hitting their 70s? Many planners suggest a so-called “bucketing” approach, where investors would have some of their money parked in cash or short-term bonds to carry them along for the meantime, while investing the rest in a more aggressive portfolio that tries to get a reasonable return. When they get to their early 70s, they can consider that portfolio to buy an annuity.
A key factor in the potential success of the approach, however, is to invest aggressively over the long-term. As Rob DeHollander, a financial adviser with DeHollander & Janse Financial Group, told MarketWatch: “I think you can get a decent return in equities over 20 years. [But over] twenty months, I don’t know.”