Like so many others, this link takes you to an AARP article that touts the benefits of annuities as a way to smooth out future retirement income. And once again, just like most traditional planning solution, it misses the mark.
Annuities are a way to reduce your assets and increase your income. Say you had $500,000 in assets and a $1500 per month income. And say the income is proving to be inadequate and you have to raid the assets on a regular basis and are concerned that you might outlive your money. The annuity solution is presented as the solution – you will be asked to take a certain amount of your $500,000 and give it to an insurance company who will in turn then guarantee you a monthly income for the rest of your life, no matter what the market conditions. This way you will not outlive your money.
Sounds like a great trick, right? But, what this strategy does not take into account is that if you are concerned about running out of money, this is an indication that you do not have a very large estate. And today, the biggest threat that will wipe out your savings are not estate taxes (death taxes) or probate costs, rather it is a very likely but unanticipated illness not covered by Medicare or your health insurance. A Stroke that leaves you paralyzed, Alzheimer’s, Parkinson’s etc. And the cost could eat your estate quickly. But, where Medicare and your health insurance will not cover the cost of care, VA and Medicaid might. But, to get these benefits you will need to give up control of any assets in your name. And the income that you have will have to be used for your care costs before VA or Medicaid will pay. So, the annuity you purchased is money down the drain. Income cannot be protected in most cases whereas with some planning you will be able to protect assets.
For most retirees today converting assets to income is NOT a wise idea given the fact that according to the Alzheimer’s Association, about half of all American’s over age 85 will deal with dementia related issues which will render them unable to care for their own needs without the assistance of others. And this will either result in the individual facing uncovered medical and long term care costs or a need to access VA or Medicaid benefits, both of which will mean that though you could plan to protect assets, you could not protect income. This makes the traditional wisdom of buying an annuity not such a hot idea.
To learn more on how to manage your long term care risk go to www.agingoptions.com.
Here's the link to the article referenced at the beginning of this post: http://www.aarp.org/work/retirement-planning/info-06-2012/older-americans-ambivalence-toward-annuities-AARP-ppi-econ-sec.html.