NEW YORK (MainStreet) -- Psst! How would you like to earn 7% on your retirement funds, risk free?
With most fixed-income investments earning less than half that amount, and bank savings even stingier, 7% sounds terrific. Stocks might do better over the long run, but with a lot of risk.
These high-looking yields come from immediate annuities, insurance products that can convert a lump-sum cash payment into a steady income guaranteed for life. Immediate annuities are getting a good deal of attention as baby boomers look for a way to mimic what their parents received through traditional pensions.
A recent report by the non-partisan Government Accountability Office joined the chorus: “Financial experts GAO interviewed typically recommended that retirees systematically draw down their savings and convert a portion of their savings into an income annuity to cover necessary expenses, or opt for the annuity provided by an employer-sponsored [defined benefit] pension instead of a lump sum withdrawal.”
Annuities are a possible remedy to the dreaded problem of “outliving your money”, but there are some serious catches.
In addition to high fees, the immediate annuity is typically an irreversible decision. The money you pay upfront is gone. If you die too soon, the income could be far less than you had paid. Some policy add-ons can remedy this, but they reduce the income stream.
Today, a 60-year-old man could receive $578 a month for a $100,000 premium, according to ImmediateAnnuities.com. That’s $6,936 a month, just shy of 7% of the premium. But a large chunk of that is actually a return of the policy holder’s principal.