From the April 2010 issue of Boomer Market Advisor • Subscribe!

Are annuities overhyped as a retirement cure-all?

An important question asked by our friends in the consumer press. Anne Tergesen and Leslie Scism write in the Wall Street Journal that many retirees are in a terrible bind. But along comes the immediate annuity as a possible solution.

"You hand over a chunk of money to an insurer, and get a hefty payment for life. Currently, a 65-year-old paying $100,000 gets about $7,500 a year...last month the White House's Middle Class Task Force recommended immediate annuities as a way to reduce the risks that retirees will outlive their savings."

Due to today's ultra low interest rates, the authors say, means taking that advice mightn't be a great move right now.

That's why many financial advisors recommend clients stagger their annuity purchases over six or so years. The idea is to lock in some of the income their clients need right away. If interest rates rise, their future purchases of annuities will deliver bigger annual income checks for the same payment.

"I am an advocate of a slow-purchase strategy," Moshe Milevsky, an associate professor of finance at the Schulich School of Business at York University in Toronto, told the authors. "You don't want to lock into a low interest rate on something that's irreversible."

Milevsky and some other academics think annuities are smart purchases for a portion of the nest eggs of people who don't have old-fashioned pension plans. In 2008, Americans bought $7.6 billion in immediate annuities, up 26 percent from the previous year, according to the Journal.

Seems what the authors ignore is that immediate annuities were never hyped as "retirement cure-alls" (at least not by the responsible set), but rather a guaranteed portion as part of a wider, and comprehensive, portfolio strategy.

Reprints Discuss this story
This is where the comments go.