There is one type of annuity that is worthy of consideration, the immediate annuity.
However, when should you use an immediate annuity?
Rule 1: When you are old as you possibly could be.
Rule 2: When you are at risk of outliving your resources.
Why when you are as old as possible?
Because the older you are, the less time you have remaining, which results in a higher monthly income (as compared to if you buy one when you are younger). This also puts you less at risk to the possibility the insurance company you buy the annuity from can go bankrupt. Less risk from the perspective that you have reduced the time you depend on the annuity for income. However, it may still be possible for the insurance company to go bankrupt while you are alive. The point being, you can mitigate the risk by reducing the time of exposure to the risk … hence, waiting until you are older.
Why when you are at risk of outliving your resources?
Because an immediate annuity is where you give the insurance company the money and they give you monthly income which you can only spend one month at a time. You can’t spend it all at once or too fast. However, if you work with an adviser who understands retirement distribution probabilities and longevity probabilities, they can advise you when you are spending too much too. The difference is whether you need to be forced to cut spending using an annuity approach (and giving up control of your assets), or whether you can self-control your spending using a total return approach (and retaining control of your assets).
Other considerations: Immediate annuities do not retain anything for beneficiaries (although some products may have a provision, however they tend to have lower monthly payouts). The interest rate environment also has an effect on monthly payouts where lower interest rates have a lower payout relative to higher interest rates.
An understanding of your spending situation is important as well as who you want to control your money and whether you have beneficiary or charitable wishes.
Have a financial question? Ask Larry!