The Annuity Gamble

Over the span of a few lifetimes, the concept of retirement has undergone radical change in America. In my great grandfather's time, retirement as we think of it today didn't exist. He was a coal miner in Pennsylvania where laborers worked until they died or became too old to wield a pick and shovel. There were no pensions, no paid vacations, and no sick leave. Then came the age of corporate benevolence. The introduction of such concepts as defined benefit pensions and Social Security paved the way to secure retirements for millions of Americans—retirements that lasted an average of eight years or so.


Today, we're living in a new age of retirement. Traditional pensions are rapidly disappearing, and saving for retirement is pretty much up to the individual, particularly when it comes to spa owners who generally don't work for a larger corporation that provides retirement benefits. Nowadays, living for 20 to 30 years beyond the average retirement age is rapidly becoming the norm and requires a new outlook on retirement planning.

For those who plan to retire one day, one question looms large: How can I make sure my money will last as long as I do? One answer, at least according to industry sources, is known as an annuity. This form of investment vehicle, sold by insurance companies, provides the buyer with a guaranteed income for a lifetime, or for a specified number of years.

Annuities can be immediate, meaning payments start right away, or they can be deferred, meaning payments will begin at some specified time in the future. Most appealing to many of today's retirees is the immediate fixed annuity that provides fixed monthly payments right away. For the retiree with substantial 401(k) or IRA assets, all or part of that money can be used to buy an annuity from an insurance company that will deliver monthly payments for the buyer's lifetime, no matter how long he or she lives.


Of course, as is the case with any form of investment, annuities have their own set of advantages and disadvantages. Potential buyers of annuities should consider these questions:

  • What if I die shortly after I buy the annuity? In one sense, an annuity is a form of insurance. If you die soon after you buy it, the contract is complete. There will be no further payments. Thus, neither you nor your heirs will get your money's worth. Conversely, if you live long enough, your payments will be more than your investment. The bottom line: Annuities are a gamble between the buyer and the insurance company. If you live a nice long life, you are the winner. If you suffer a premature death, the insurance company wins all the chips.
  • Will I have any protection against inflation? With any form of fixed annuity, the dollar amount of your payments will never change. While you won't outlive your monthly payments, their buying power will decrease over the years in concert with the rate of inflation.
  • Will my heirs get anything when I die? The contract represented by an annuity is completed on the buyer's death. An annuity benefits you by providing a steady stream of income over your lifetime. The tradeoff is that your heirs will not receive any portion of the money used to buy your annuity.
  • What if I need my money for an emergency? When you buy an annuity, the money involved is no longer available to you except in the form of your monthly payments. That's why you should only invest in annuities to the extent that leaves you with sufficient liquid investments to take care of unexpected emergencies.


It's primarily for these reasons that traditional annuities have not met with the popularity that sellers would like. That's why the industry is tinkering with annuity contracts that satisfy many of these shortcomings. For example, some companies are now offering annuities that will guarantee lifetime payments to a surviving spouse, adjust monthly payments to compensate for inflation, or allow you access to part of your money to meet unexpected expenses such as medical bills.

As you might expect, these new features come at a price. The more flexibility in the contract, the higher the initial cost for a given monthly payment. Current interest rates also figure in the purchase price of an annuity. So what will you get for your money in a fixed immediate annuity? There are many variables, including your age, current interest rates, and even the state of your residence, that make it difficult to come up with a "typical" answer.

For an estimate involving your personal circumstances, log on to According to that website, here's what a 65 year-old male in the state of Pennsylvania can currently expect to get for an investment of $100,000:

  • Single lifetime income with no payments to a beneficiary: $706 per month
  • Single lifetime income with up to 10 years of payments guaranteed to your spouse: $675 per month


With lifetime financial security so important these days, the insurance industry is working hard to make annuities more attractive to current and potential retirees. Even Congress is getting into the act by offering tax incentives designed to encourage retirees to invest at least part of their savings in annuities.

Many experts feel that the best road to lifetime financial security is knowledgeable management of your own investments. Still, for some, the purchase of an annuity may provide a leg up in the quest for a secure retirement.—William J. Lynott

William J. Lynott is a freelance writer whose work appears regularly in leading trade publications and newspapers as well as consumer magazines. You can reach him at [email protected] or through his website