Real Life | De-mystifying annuities: “Are they right for me?”

“Lately, the media are full of hype, both pro and con, about annuities. What should I know about these mysterious financials? Are they right for me?”

Yes, and thanks, Reader F., I’ve noticed the info-mercial shouting match, too. And, yes, I think everyone who manages money should embrace the factual basics about annuities, if for no other reason than they’re unique, very different from other instruments in our financial toolbox.

But, more important, because our life expectancy is reaching nine and 10 decades, we risk outliving our income resources, or having to stretch them out too thin to assure enough income. Because annuities address this need, sales are booming.

Our advisors implore us to shift our primary investment objective from capital accumulation and growth to lifelong income — steady, predictable, certain cash flow. That’s an annuity’s mission that it was invented for a couple of centuries ago. Simply defined, “annuity” means an arrangement in which a party guarantees to pay a regularly scheduled specified (sometimes variable), income to an individual, beginning at a specified time during lifetime and lasting for as long as the annuitant lives. If it’s funded, it’s a systematic liquidation of capital and future earnings, transforming them into cash-flow income, plus the vital guarantee that the cash will keep right on flowing for the rest of the annuitant’s life, even long after the funding is exhausted.

Unless it’s a gift (you should be so lucky!), this benevolence is in exchange for an up-front contribution in the form of a capital (money) contribution, taxes, a winning lottery ticket, or long-term time and labor (employment). Our Social Security, V. A., military and employer-provided pensions, and life insurance life income settlement options all are annuities.

Virtually every annuity is funded by dedicated capital, called “reserves” calculated by mathematician-sociologist-prophetic wizards called “actuaries”, to guarantee and assure the availability of the annuitant’s benefits for those many future years. Laws and government enforcers aggressively police those reserves’ adequacy, except, of course, politician-vulnerable government and non-profit-organization programs periodically rescued from bankruptcy by appropriations, loans, or re-structuring.

Our personal life insurance company annuity contracts’ funding is rock-solid, like our life insurance. Companies even supplement their reserves’ defenses against loss by “re-insuring” their obligations in multiple other insurance companies, thus maximizing the pooling of risk, the essential fundamental principle of all insurance. Contracts issued by the big old-line leading companies, especially those regulated by the state of New York, are regarded as being at least as safe as an FDIC-insured CD.

Some things that a personal annuity can do

You can buy in with a lump-sum or installments, the sooner the better to maximize accumulation, at minimum guaranteed interest rates better than CD’s and about the same as long-term bonds, until and continuing after your chosen future benefits commencement date. You select an after-death continuing guaranteed benefits option, anywhere from none at all or for a specified number of years, to lifetime income to your survivor for his/her lifetime, or various options in between. And if you don’t even make it to the start date, the capital sum goes to your beneficiary.

Here’s what a $ 100,000 single premium plan from one of those golden oldie companies can do:

If you’re a male, both contributing and starting at age 65, and electing the joint and survivor option for beloved, the monthly benefit will be $432.81. If one of you lives to age 85, that’s $ 103,874; to age 95 it’s $ 155, 811. If Beloved doesn’t need, and you instead elect the “Return of remaining principal at death” option, the monthly benefit is $ 495.04, totaling $ 118,810 by the time you’re 85, or $ 178,214 by age 95.

If you’re starting at age 75, the monthly benefits are about 22 percent higher, and if you’re female, they’re about 9 percent higher than same-age male rates are.

The monthly cash flow and any lump-sum terminal settlement are almost fully income tax free; only the minor portion attributable to interest earnings is taxable.

Compare all of that to the cash flow yields from other virtually risk-free investments, such as FDIC-insured savings or CD’s, municipal or government bonds or bond funds. After-tax 1.0 percent net interest yields $83.33 per month; 2.5 percent yields $208.33, andsupplementing those yields with withdrawals of principal risks running out of money before running out of life. And those rates aren’t guaranteed for longer than a few months or years, let alone for life.

Annuities can fund “qualified” do-it-yourself retirement plans, like IRA’s, Keoghs, SEP’s.

Death benefits are beneficiaried, avoiding probate, and are income tax-free, like life insurance death proceeds.

Like our parents’ policies, some contemporary plans offer modest optional interest rate changes to address inflation, and partial withdrawals for medical urgencies, in return for slightly lower benefits rates. One leading mutual company has just started paying dividends, like life insurance policyholders get.

Reluctant to make significant charitable gifts because you’ll need the assets for your and beloved’s old age? A tax-favored charitable gift annuity enables both a now-gift and life income, a “win-win” for both you and the institution.

Because we can choose among many income start dates, benefit durations, and survivor options, and be experted by recommended, credentialed annuities professionals, we can advantageously tailor our plans to coordinate with our and beloved’s other income assets, such as Social Security, retirement pensions, and future asset acquisitions.

Instead of spending our mornings immersed in the Wall Street Journal and playing phone tag with our brokers, we can go ahead and play golf, while our annuities’ teams of gurus manage them for us.

... and won’t do

Conceived to be a long-term-only instrument, annuities won’t turn a quick profit. The far-into-the-future guarantees require time to weather economic ups and downs. The necessary “loads” that cover the cost of the management and marketing that keep plans financially healthy are minimized, almost negligible, but only when amortized over many years’ time. Speculation is what stocks, minerals futures, and boom-town real estate, not annuities, are for.

They’re not liquid, either. You can’t cash surrender to pay a grandchild’s medical school tuition, trade off for some other investment, or even to cover Loved One’s or your crushing nursing home bill.

Nor will they appreciate in value, or keep up with inflation or the stock market, (although some offer a small variable option). Their duty is to remain guaranteed and rock-solid for you. They lifetime-guarantee the systematic liquidation of capital, the opposite of capital growth. Growth and hedging market fluctuations are the duties of other assets in our balanced portfolios.

But they won’t depreciate during recessions or depressions. They’re likely to be among the last instruments to wither in a catastrophic world-currencies collapse, an economic doomsday for which no guru has discovered a really credible defense.

So, Reader F. and others, you’re annuities-wizened now, yes? And you still have time for a round of golf.

This story was originally published September 28, 2015 at 8:31 AM with the headline "Real Life | De-mystifying annuities: “Are they right for me?”."