Humberto Cruz: Immediate annuities can be good option for income, peace of mind

"I am 63 and retired. I'd been skeptical about income annuities because I thought they were too conservative. I receive a good pension and Social Security.

"Last August, after a long talk with my financial adviser, I used $400,000, about half my portfolio, to buy an immediate annuity. It pays $2,568 a month as long as I live, with payments guaranteed for 15 years (even if I die before 15 years have passed).

"In retrospect, following the stock market's steep decline, I think it was just about the smartest financial decision I ever made. Did I do the right thing?"

I like immediate annuities (I own three) for the lifetime income and peace of mind. But I would have done some things differently.

An immediate or income annuity is an insurance product that turns a lump-sum premium into lifetime income. They should not be confused with deferred variable annuities, which are investment-insurance products that can be quite complex and often charge high fees.

Many people hate "giving up" their principal to an insurance company, and immediate annuities had been slow to catch on. But amid the stock market meltdown, sales of these annuities rose 30 percent, to an estimated $8.6 billion, last year. More people are buying, however, at a time when paltry interest rates lower immediate annuities' lifetime payouts.

As to your question:

I would have opted for a "joint-and-survivor" payout option, with payments continuing until both you and your wife die, recognizing that payments would be lower.

By selecting the 15-year guaranteed period, you made sure your wife receives more than the $400,000 principal back if she lives that long and you don't. But the main purpose of immediate annuities is to protect against "longevity risk," or living so long that you run out of money. Women on average live longer than men, and your wife's payments would stop in 2023 if you die before her. If you two were fine with that decision, though, so am I.

Having both a pension and Social Security (both are lifetime annuities), I would not have committed half my portfolio to an income annuity at the relatively young age of 63 and during a period of low interest rates.

I would have considered an annuity "ladder," buying, for example, a $100,000 annuity every year for four years. That way, payouts for future annuities increase if interest rates rise. Even if interest rates stay the same (they have fallen since you bought but don't have much more room to fall), payouts are higher the older you are when you buy an income annuity.

I don't know whether you or your adviser compared annuity payout quotes from different insurance companies (you told me he works for one, and that's the one he recommended). Websites such as immediateannuities.com let you compare payouts from many companies.

Your adviser does work for a company with the second-highest financial strength rating from A.M. Best, the best-known rating firm. For an explanation of ratings, look here. I prefer buying only from companies with the two highest, or "superior," ratings from A.M. Best. All annuity guarantees are backed by the insurance company issuing them.

For added safety, I would have bought annuities from different insurance companies so none exceeds the state guaranty association coverage limits if the insurance company goes bankrupt.

Send questions or comments to Humberto Cruz at AskHumberto(at)aol.com or c/o Tribune Media Services, 2225 Kenmore Ave., Buffalo, NY. 14207. Personal replies are not possible.