Wade Pfau in Barron’s: The Best Annuities

Wade Pfau Weighs in on the Best Annuities

Originally published at Barrons.com

There are more options than ever before with fixed-income annuities. All are variations on the most basic immediate-income annuity, which turns a lump sum (your premium) into monthly income for life. Those payouts begin immediately upon purchasing the annuity. In early June, the most competitive of these contracts for a 60-year-old man investing $200,000 offered a $1,006.66 monthly payout, or $12,079.92 yearly. If the investor dies before collecting $200,000 in income, any remainder gets absorbed by the insurer. Some contracts offer guaranteed income over a surviving spouse’s lifetime as well, or a return of remaining principal to heirs, albeit at the cost of lower payouts (see chart nearby).

Consider an income annuity as part of your overall fixed-income allocation, says Wade Pfau, a professor of retirement income at the American College. “Income annuities are superior to bonds, but not necessarily superior to stocks,” he says.

Mathematically speaking, investors would come out ahead if they replaced their entire fixed-income investment portfolio with income annuities, Pfau says. But this is unrealistic: “It doesn’t account for needing funds for unexpected spending,” he adds.

Devoting half their bond portfolio to an immediate-income annuity did the trick for Jerry Throndset, 73, a retired pharmacist in Lakefield, Minn: “When I created a yearly, monthly, and daily budget, I had a gap between what I could take out of savings and what I needed to live on,” Throndset says. “An annuity filled that gap.” His advisor, Dean Harder of The Harder Group, estimates that Throndset and his wife have 30% more income than without the annuity.

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