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Shopping for Fixed Immediate Annuities

As we’ve discussed before, single premium immediate fixed annuities can be a great tool for retirement planning. They provide a high, predictable level of income for the rest of your life, no matter how long that might be. (Note: Annuities have their drawbacks, too. See the article I just linked to for more info.)

But where is the best place to look for such an annuity? And how should you choose between them?

Where to Get Annuity Quotes

The first place I’d go to look for annuity quotes is Vanguard’s site. To access their quote system, visit their “income annuities” page. Then click the “income solutions” link on the right side of the page.

You’ll have to create an account to use their service. Fortunately, however:

  • It’s free, and
  • They don’t send you any marketing materials. (At least, they haven’t sent me any, and I created my account several months ago.)

The reason Vanguard’s system is my favorite is that I have yet to find any other websites that offer quotes for annuities with inflation adjustments. If, however, you’re looking for an annuity without inflation protection, a quick Google search will turn up an abundance of websites that provide annuity quotes.

How to Choose an Annuity Provider

To get the maximum benefit from an annuity, it’s important to minimize the risk that your annuity provider goes under before you do. Rather than just choosing the insurance company that offers the highest payout, be sure to take each company’s credit rating into account.

If the website you’re using to find annuity quotes doesn’t provide information as to each provider’s credit ratings, you can look them up online at any of the following sites:

While we’re discussing credit risk, I should note that it’s worth making an effort to stay under the coverage limit of your state’s guarantee association. For example, if your state only provides annuity coverage up to $100,000 and you plan to annuitize $300,000 of your portfolio, it may be wise to buy a $100,000 annuity from each of three different insurance companies rather than buying one $300,000 annuity.

Should You Get a “Fixed Period” Rider?

Some annuities come with a rider that provides for a guaranteed minimum benefit period. For example, if you purchase an annuity that has a 10-year guaranteed benefit period, then you die 4 years after purchasing the annuity, the annuity would pay out to your named beneficiary for the remaining 6 years of that 10-year period.

For the most part, I’d suggest avoiding such riders. The unique benefit to an annuity is that it provides a higher level of income than you can safely withdraw from a non-annuitized portfolio. The more riders you add to your annuity, the lower the payout gets.

That said, the cost of a fixed period rider isn’t terribly high. In many cases, an annuity with a 10-year guaranteed period will provide a payout that’s more than 95% of what an annuity without such a rider would pay. In short, if:

  • You think you should be buying an annuity, but
  • You can’t stomach the possibility of your money being lost to your heirs in the event that you die the day after you buy the annuity

…then go ahead and get a guaranteed period rider.

Shop Around

Lastly, each company seems to have a (slightly) different mathematical model that they apply to determining the payout for a given annuity. As such, it pays to take the time to shop around and look at many insurance companies before forking over a significant amount of cash to any one of them.

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Comments

  1. Mike, you forgot to mention that folks can also get help shopping for a single premium immediate fixed annuities and choosing features from a fee-only financial planner without fear of being sold something. People may want help but expect that an advisor will only steer them toward the insurance companies he represents. Fee-only planners have no compensation incentives, agent agreements, or other arrangements with financial product providers. Furthermore, a planner you can hire by the hour can assist with as much or as little guidance as someone needs or wants to pay for.

  2. Dylan makes a good point. I would however even question the fee-only planners. Are they sending you to someone who refers business to them? It isn’t always as squeaky clean as it seems. For example, TD Ameritrade will refer you to fee only investment advisors. Guess who those fee only advisors will recommend you roll over your 401k to? You get 3 guesses and the first two don’t count.

  3. @DIY-

    “For example, TD Ameritrade will refer you to fee only investment advisors. Guess who those fee only advisors will recommend you roll over your 401k to? You get 3 guesses and the first two don’t count.”

    I don’t think that is a fair example to make. TD only refers to advisors that manage assets in TD accounts, so yes, it only makes sense that money winds up in a TD account. Most discount brokers or insurance companies won’t even know that a financial planner recommended them. Even if they do, they may not care. Most brokerages and insurance companies don’t make any adviser referrals.

    I’m not saying fee-only is panacea or eliminates all conflicts, but it does address a significant conflict of interest created by third-party compensation arrangements. Anyone using a financial adviser for any reason ought to thoroughly question them and keep an eye out for potential conflicts of interest such as referral arrangements and the like, but the TD thing is uncommon, and it is well disclosed. It also only applies to asset management, not strait-up financial planning.

  4. You’re probably right – that was probably a cheap shot at TD Ameritrade. You are right also that a registered investment advisor/fiduciary has to disclose referral arrangements. I agree also that fee only is the way to go. Going straight to an insurance company and asking about their annuity products can be hazardous to one’s wealth.

  5. Hi Dylan.

    Question for you: Are there any annuity providers that an investor would only have access to via a financial planner?

    (To be clear, I’m not trying to discredit the usefulness of getting help with the shopping process. I just want to be clear on whether or not there’s also an increased range of available products if using an advisor–because I honestly have no idea.)

  6. Hi Mike.

    No. There are no products of any kind that can only be accessed via a financial planner. There are “advisor sold” products, but that just means you buy it through a broker, and they are really no different than buying any old ETF. American Funds is a classic example of the “available only through an advisor” illusion. They just don’t sell direct (neither does iShares, but they don’t put on the same marketing spin).

    The only quasi-exception to the “available only through an advisor” might be DFA funds which require an advisory agreement between the client and a DFA-approved adviser. But that adviser can function exclusively as an asset manager. That’s why I say “quasi-exception.” It’s really not that different from having assets managed by a sub-advisor within a mutual fund.

    The benefits of working with a planner are access to which-to, how-to, why-to, where-to, and/or when-to knowledge, not products.

  7. Right, DFA is what I was thinking of when I asked. I was wondering if there was anything analogous in the insurance/annuity field.

    Thank you for the information. :)

If you want to discuss this article, I recommend starting a conversation over at the Bogleheads investing forum.
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