No. of Recommendations: 9
That said, I think annuitization of some money is often a useful tool for people with longevity in their family. And if you do indeed have a good longevity probability then the planning for annuitization should begin long before age 90. I wonder if there are insurance instruments out there that have a smaller principal payment up front, and begin their annuitization at age 80 or even 90? I just checked one of those online calculators (https://www.schwab.com/annuities/fixed-income-annu...) and it says that if you are 60 today and invest a one-time $100,000 in an annuity, you will receive about $3600 a month beginning at age 80.On the first comment, a likely better observation is that annuity makes a lot of sense if you're already old. The internal rate of return is effectively negative for most annuities. If you're going to have one for a long time, the rate of return within one's investment matters. If you're already 90, or even 85, the advantages of the "payments for life" portion of the deal likely far outweigh whether the annuity is 20% overvalued relative to an actuarially fair one. In short, you won't live long enough for the difference between a good investment rate and a bad investment rate to matter.
The corollary is that buying an annuity when you *aren't* pretty old (say 85+??) is a really bad deal, financially. It might make very good sense for other reasons, but annuities are spectacularly bad investments in terms of a chance of getting more than you put in. You'd typically have to outlive your life expectancy by 10-20 years to merely break even in real terms, let alone having had any return on your capital.
But as a result of that, to your second point, buying a deferred annuity isn't usually a good idea. Much better is to buy TIPS with a term ending when you want the annuity payments to start, then use the capital when the TIPS mature to buy an immediate annuity. The advantages are many: you get very much more income per month, as you've had a positive real return rather than a negative one during those years. You are inflation protected for the intervening years, and fully inflation protected annuities basically don't exist. If you die before that target date, the TIPS are in the hands of your estate instead of the insurance company. You can change your mind and switch to annuity sooner (or later) if you like. Or you could do something else with the money. Or half and half. If you get a "one year to live" diagnosis, you likely want to spend it or give it away.
For the original poster, an immediate annuity would seem to make the most sense. It is unlikely they will live long enough for inflation to be a main concern, with a life expectancy if healthy of under 5 years. But if it's a concern, I'd put great majority of the money in an immediate annuity and the rest in a TIPS-for-a-few-years-then-immediate-annuity strategy above, so the monthly income jumps upwards after a few years. This might be useful less for inflation protection than in the case of concern of a big step-up in expenses when moving into full care situation; simply switch the held back portion from TIPS to annuity on that date. They are liquid.
Jim
