In our last blog post, we discussed a few varieties of immediate annuity. Now here is the key question: what are the drawbacks of immediate annuity?
The biggest drawback of immediate annuity is probably the low interest rate risk we are facing in today's environment, because with low interest rate comes with low monthly benefit payments. For people who want the biggest bang for their money, how to deal with the low interest rate risk?
There are two strategies to deal with the low interest rate risk:
1. Delay the Purchase
Wait till the interest rates are higher to purchase annuities. The side benefit is you will be older which will get you to higher payment level (because you will have less number of years to receive the payments).
2. Create a ladder
If you need money now, you can divide your money into a few portions, for example, divide your $300K savings into 3 $100K blocks, and spend the first $100K block this year so you can start getting some monthly payment. Next year, spend the next $100K block ... in this way, you can benefit from the rising interest rates.
The biggest drawback of immediate annuity is probably the low interest rate risk we are facing in today's environment, because with low interest rate comes with low monthly benefit payments. For people who want the biggest bang for their money, how to deal with the low interest rate risk?
There are two strategies to deal with the low interest rate risk:
1. Delay the Purchase
Wait till the interest rates are higher to purchase annuities. The side benefit is you will be older which will get you to higher payment level (because you will have less number of years to receive the payments).
2. Create a ladder
If you need money now, you can divide your money into a few portions, for example, divide your $300K savings into 3 $100K blocks, and spend the first $100K block this year so you can start getting some monthly payment. Next year, spend the next $100K block ... in this way, you can benefit from the rising interest rates.
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