Money expert Clark Howard hates most annuities. He even calls “annuity” a “curse word” on his podcast.
However, there are often exceptions to rules. And that’s the case here. Clark embraces immediate payout annuities and longevity annuities as legitimate options for some people.
Clark’s Approved Annuities
1. Immediate Payout Annuities
Not long ago, many retirees could count on a company pension and Social Security benefits on top of whatever they managed to save. Pensions are now becoming a rarity. And Social Security retirement benefits could be reduced as early as 2033.
With an immediate payout, you are creating your own pension plan.
Immediate payout annuities involve giving an insurance company a one-time lump sum — typically a minimum of $100,000. Then you start receiving payouts monthly, quarterly or yearly. These annuities usually start paying out within one month and always within one year.
It is important to remember that your return will be tied to current interest rates and you may be able to earn a greater return elsewhere.
However, if you have a nice pile of money in a 401(k) or IRA, an immediate payout annuity can take away the anxiety of market volatility by guaranteeing you a certain income stream. This may give you added peace of mind alongside your Social Security benefits.
There are two types of immediate payout annuities to choose from:
Period Certain Immediate Annuity
For this type of annuity, you select the time period for which you would like to receive your payouts, typically ranging from five to 20 years.
Pro: With this type of annuity, you can set up a beneficiary to receive your payouts if you die before the term is complete.
Con: Your payouts will be slightly lower than if you selected a life-only annuity.
Life-Only Immediate Annuity
With a life-only immediate annuity, payments will continue until your death.
Pro: The payouts are a little higher.
Con: If you pay, say, a $300,000 lump sum, only to die three months later, you and your family are out of luck.
“The beauty of the immediate payout annuity is it’s like setting up your own pension,” Clark says. “For whatever money you put into it, you’re going to have your own made-to-order pension.”
2. Longevity Annuities
Despite a dip in the life expectancy of Americans influenced by COVID-19, the longer-term trend is for us to live to increasingly older ages.
As of 2019, 65-year-old women in the United States could expect to live, on average, until 86. The number of people living to be 100 years old is climbing as well.
What does that mean for our finances? It’s easier to make your money last until 85 than to 105. The older you are, the more inflation probably cuts into your purchasing power (and the more expensive your medical bills probably get).
Longevity insurance, or a longevity annuity, helps protect against demoralizing financial problems related to living an extraordinarily long life.
You generally buy one of these policies early in retirement. You’ll pay premiums for years. But you typically won’t start getting paid until you’re 85 years old. If you live that long, however, you can expect sizeable checks for the rest of your life — even if you do live to be 100.
Pro: You don’t have to worry about saving for an extremely long life — just until your longevity annuity kicks in.
Con: If you want your kids to inherit anything, they are out of luck.