Kevin McCormally:I am Kevin McCormally of Kiplinger's and I am here with Mary Beth Franklin, the senior editor of Kiplinger's Personal Finance magazine to talk about annuities. Mary Beth a lot of people who are looking in annuities as the way to create a lifetime stream of income. When do they make sense?
Mary Beth Franklin: Well, for so many people who no longer have a pension, this is the way to do it yourself pension. It creates a stream of income,, you give an insurance company a chunk of money say a $100,000 and they promise to send you a monthly check for the rest of your life no matter how long you live.
Kevin McCormally: Got an example about what kind of income you could get from say a $100,000?
Mary Beth Franklin: Sure, a 65 year old man would probably get about $700 a month, 65 year old women a little less because she would have a longer life expected.
Kevin McCormally: But that's a set payment, right? What about inflation? Isn't that the greatest fear of retirees on a fix income? How does an annuity play into that?
Mary Beth Franklin: Well, that's one of the down sides of a fix annuity as you are getting a set payments for life and after a number of years, you are simply not going to have the same buying power. So what some people would is buy a another annuity at that point. The good point of that is the older you are when you buy annuity, the bigger is check.
Kevin McCormally: Any there is a draw backs to immediate annuities?
Mary Beth Franklin: Well frankly it's giving over control of the chunk of your assets. If you live to your life expectancy or beyond, it's probably a good deal for you. If you sign the contract and get hit by a bus it's not because the insurance company gets to keep the money.
Kevin McCormally: Are there any other ways to provide lifetime income?
Mary Beth Franklin: Well because so many baby boomers are coming up on retirement without traditional pensions. The insurance companies are really stepping in with new flexible products. Same idea, you would given them a chunk of money, they promise you a pension for life but there are other drawbacks. You wouldn't get quite as much money as you would with a traditional immediate annuity, but you would have more flexibility that you could get some of your money back.
Kevin McCormally: So, as the boomers move into retirement we can expect to see more new creative projects like that.
Mary Beth Franklin: Right, and the bottom line is don't buy anything unless you understand what it does.
Kevin McCormally: Thank you very much.
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