A Framework for Deciding Whether to Annuitize

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Advisors and investors wonder what role annuities should play in retirement planning. Here are the pros and cons of a common annuity product versus consuming out of invested wealth.

There is a bewildering assortment of annuity products. In this article, I analyze the pros and cons of a non-qualified, immediate, fixed-rate annuityi:

  • Non-qualified means it’s purchased with post-tax dollars.
  • Immediate means its payments begin right away.
  • Fixed rate means that the annuity guarantees the annuitant a fixed rate over the life of the policy.

Consider a hypothetical retired couple – a 67-year old and his or her 63-year old spouse – who want to decide how much of their savings to invest in an annuity and how much of it to invest in a combination of stocks and bonds. How should they make this decision? What are the trade-offs involved and how can these be quantified?