Monday, June 22, 2009

Annuities: watch out

Humberto Cruz is a bright, astute financial expert who answers questions from the public. Today, he answered a question about annuities in the Kansas City Star. You can see the question and his answer here.

Here's my thoughts on it.

These types of products become more popular during market turmoil. It's human nature prevailing over investment history. To me, the worst time to enter into contracts like this is as a response to the investment environment. In essence, you are entering into a long-term contract (fifteen years at least) because of shorter-term market conditions. And, in this case, you are doing it when interest rates (used by the insurance company to determine your payout) are near historical lows. Good for the insurance company and bad for you. Need I add that it's an easier sale for insurance agents, too?

In some circumstances, using an immediate annuity could be a wise choice. But the wisdom of that choice is best determined when the markets are more "normal." My advice would be to carefully consider the options over several months. Try a ladder as suggested by Mr. Cruz to catch some better payouts when rates rise again. Don't let fear drive your retirement decisions.

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