We read all the personal finance news for you. Then we tell you what you need to know.

Guru Q&A: Is an Annuity Right for Me?

FiLife User Question: I draw social security and I work part time. My wife and I have rental property that we plan to sell when she retires in another 8 to 10 years. I rolled my 401K into an IRA when I retired. It has lost about 30% of its value this year. What guaranteed rate would I be able to get on an annuity? I don’t expect to start drawin the annuity for another 5 years. What is my best product?
-Lake

FiLife Guru Repsonse from Ali Rogers: Hi Lake, I’m the real estate guru, so I can’t directly answer your annuity question — someone else will have to jump in there — but I do want to provide a note of reassurance about that rental property!

The U.S. housing market is in the middle of a down cycle, but prices do typically recover, especially when you look at timeframes that are ten years long — make sure that you keep it insured and in good repair, and it will be a valuable chunk of your wife’s retirement when her turn comes.

FiLife User Repsonse from Lake: Thanks for answering my question. My wife and I too are real estate agents. I have decided to buy a model home (under construction) from a national builder and rent it back. They are willing to pay 25% above market rent. I plan on rolling my retirement IRA into it as a down payment (depending on what my accountant has to say).

FiLife Guru Response from Michael Kitces: There are a number of annuity products that may be helpful for you, but you need to be VERY careful to understand what is guaranteed and what is not.

In terms of annuities that provide a guaranteed RETURN (generally, fixed annuities), you will find that the rates are typically similar to CDs (although some annuities have been offering slightly better returns than CDs lately). Suffice it to say, you’re talking about typical fixed-income-oriented returns.

Other annuity products provide a certain amount of guaranteed FUTURE INCOME. They do NOT guarantee the actual return on your account balance, which can still go down and be depleted. But they may guarantee a certain amount of future income, that will continue for the rest of your life, even if your account is depleted. Of course, there is a cost to these guarantees, and in essence you will give up a significant amount of your upside growth accumulate over many years in exchange for the guarantee. But nonetheless, it is a guarantee of a certain amount of minimum income in the future, while also still giving you an opportunity to be invested in the markets with the possibility of getting a higher return (and also the risk that markets will decline further and that you will be forced to actually use the minimum guarantee).

If you’re interested in learning more about retirement income guarantee products and how much income they will guarantee, you’ll have to contact an annuity agent in your area, or better yet a financial planner that also works with annuities. Different annuities provide different guarantees, and their effectiveness depends on more precise details about your situation that a financial planner can help you with. If you need help to find a financial planner, check out PlannerSearch.org.

I hope that helps a little!

FiLife Guru Response from Dave Hanson: Mike gave you an excellent thumbnail sketch of annuities. I want to reinforce his suggestion that you consider consulting a financial planner before purchasing one of these products.

It sounds as though you are shell-shocked by your recent market losses–and understandably so! You are certainly in good company. The problem is that making decisions about financial planning based on emotion–even reasonable, understandable emotions like fear of losing your retirement savings–almost always leads to very poor long-term results. That’s why it is so important to have a plan in place that addresses your specifics needs BEFORE major market moves.

Specifically, a good financial planner could show you how to devise a plan that gives you the safety that will let you sleep at night at the least possible cost to you in future returns. For example, some combination of something like a high-rate CDs, an inflation-protected bond index fund, and a stock index fund might cost almost nothing in fees, and allow you both substantial safety and a good potential return. By contrast, an annuity sold to you by a salesman–who had to earn a sales commission plus overhead for his firm–may not be able to do that, and certainly will not bring the same disinterested perspective to your situation. In any case, we have reviews of all these products here at FiLife that can help assist you with your research.

Best of luck to both of you, whatever you decide!

-FiLife Gurus Ali Rogers, Michael Kitces and Dave Hanson