Annuity shopping for an individual reaching retirement age; how to do?

[Guest herronisland]

I'm an attorney. My friend/client will turn 65 on November 22nd. All of his money ($500,000) is in TIAA-CREF. He was about to sign up for a ten year annuity from TIAA-CREF when I asked, "how do you know that's the best deal for you?"

I volunteered to help.

Now I need YOUR help. What's the best way to shop for an annuity for him? He wants a guaranteed income of about $4000/month for ten years. His money is currently distributed among three mutual funds in TIAA-CREF. He'll be surprised if he lives more than ten years.

Thanks. If you'd like, write to me directly at mkogut7007@juno.com

[Guest Yanikoski]

Is your client in unusually bad health? Normal life expectancy for someone age 65 would be closer to 20 years than 10 years. If his life expectancy is really only 10 years (or less), then an annuity could be a horrible deal for him.

Actually, I would personally be happy to offer him the deal he wants. If he needs $4,000 a month, that's $48,000 a year. For ten years, that's a total of $480,000. Since he's already got $500,000, I could pay him what's looking for and have $20,000 left over, even if I just hid the money in a mattress!

Suppose instead he invests it conservatively and earns 3% a year (after taxes), the fund won't run out until sometime in the 14th year. And if he does die before then, he can leave the money to someone he cares about, or some charity.

If he still wants an annuity: Annuity companies change their rates all the time, mostly to reflect the current interest rate environment. You should probably ask for quotes from half a dozen different companies. You might also take a look at http://www.immediateannuity.com, which does on-line quotes.

[david rigby]

If you invest at 3% and pay out exactly 120 payments (that is, without regard to forfeiture upon death), the $500K would produce a monthly amount of about $4,800. I agree that an annuity purchase is not wise for someone who expects a shorter than average life expectancy.

Perhaps he should look at some forms of trust. Something that could pass on a remainder to a charity or beneficiary.

Of course this is assuming the individual has access to a lump sum option.

[joel]

What does his current carrier TIAA offer?

[ljr]

TIAA-CREF has a great reputation so the most recent post is indeed a good idea. You can also check with other highly rated insurers such as Northwestern Mutual, etc. If you friend is concerned about a lifetime income, he could get the kind of annuity that guarantees some payment after his death. There's a type called installment refund whereby the insurance company would pay his beneficiary any dollars remaining at death. For example, if the annuity cost $500,000 but he received only $400,000 in payments, his beneficiary would get the remaining $100,000. No, not a great investment but the only way to absolutely guarantee an income for life, and I'm not a great believer in insurance products. A managed trust account would most likely be a better investment but can't guarantee the lifetime income.