Should My Sister-in-Law Buy an Annuity?
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Question:
My sister-in-law only gets Social Security of $1,500 a month and her husband $750 a month. Her husband is sick and when he dies she will loses his share of the Social Security. They have about $300,000 of equity in their home will come her way when she sells when he dies. They don’t have any children, so no need to try to preserve an inheritance. My question is whether she should invest some of the house proceeds in an annuity? She has no experience investing and I’m worried that someone could take advantage of her. Her mother lived until 100 and she is 70 now. Of course, some of the proceeds would go into an emergency fund.
Response:
This is a financial planning one, not a legal one. But buying an annuity does seem to make some sense for the reasons you state. The risk of outliving one’s resources is often referred to as “longevity” risk. The annuity would protect against it.
Annuities are contracts with insurance companies under which they agree to pay the annuitant a fixed amount for the rest of their lives. (These are sometimes referred to as “immediate” annuities as opposed to “deferred” or “variable” annuities, which are more like investments and can be extremely complicated to evaluate and compare.) In determining the amount of the annuity payments, the insurance company factors in how long it is likely to have to pay based on the average or “actuarial” life expectancy of the population of purchasers. If, for instance, that’s 15 years for 70-year-old women, then it prices the annuity to make a reasonable profit if it invests the purchase price and makes payments for 15 years. If instead, your sister-in-law lives to 100, she will do much better financially with the annuity, in effect doubling her investment.
It also helps that interest rates are relatively high now, so the annuity payments should be higher than the would have been a few years ago when interest rates were lower, since insurance companies invest in bonds. Given that bonds are paying more now, means that they can in turn pay out more on annuities purchased now. Further, as you say, annuities relieve the annuitant from having to worry about investments, from downturns in the market, and from predators who target older people with savings.
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Such a small amount of money and such high fees with annuities. Would she agree to you or another trusted person helping her manage her money? CD’s and T-Bills don’t have the high fees that annuities have. Be sure you read the annuity fine print very carefully. The costs will be hair-raising. Either way, she’s going to be very short of income and struggling. Once she sells her home, monthly housing costs (rent) will consume a large portion of her income. Think long and hard about tying up all of her savings in an annuity because she loses all financial flexibility. Very tough situation.