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If there’s a single shining example of investors outsmarting themselves, it has to be annuities.

Annuities are cash for life. You turn over a lump sum of money to an insurance company that pays you a set amount of cash on a regular basis until you die. Retirement experts who are unbiased because their income isn’t tied to the sale of products really like annuities. The level of pushback from investors on annuities is striking. It’s hard to get them to keep an open mind, which is why a recent query from a reader jumped out at me. “My dad gets retirement income from an annuity,” he wrote. “Should I do the same?”

The short answer: I have no idea because this reader hasn’t provided any personal information. But I can help build a profile of the ideal annuity customer:

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  1. You have no pension from an employer, only your own savings plus government benefits: Putting a portion of your retirement savings in an annuity will give you what amounts to a mini-pension. Zero worries about the stock market’s ups and downs. You can get built-in inflation protection as well.
  2. You understand the cash-for-life quid pro quo: Annuities are not a liquid investment. They can’t be sold or redeemed to get your capital back and they can’t be willed to a beneficiary when you die. Note: There’s typically an option to guarantee annuity payments for a set period, in case you die after buying. The money goes to a beneficiary.
  3. Your health is good and longevity runs in your family: The longer you live, the more cost-effective an annuity is as an income-producer.
  4. You understand that interest rates aren’t going to surge higher: The background here is that interest rates have a big influence on annuity payouts. The standard annuity put-down is that they’re not worth buying when interest rates are low. Bulletin: There is little chance of interest rates jumping in the foreseeable future. If they do, you won’t be happy about it because inflation will be a problem. It’s possible to “ladder” annuities, which means buying small annuities over time to benefit from any rate increases.
  5. You’re willing to spend some time to get the best payout possible: Insurance people sell annuities – you can’t buy them directly and you can’t easily compare payouts from insurer to insurer. That means calling or e-mailing to get quotes based on your situation. Note: Payouts can vary significantly, so comparison shopping is mandatory.

One more thought for the reader asking about annuities: Ask your dad how he likes his annuity. Is he happy with his cash-for-life payments? Does it reduce his worrying about money? Would he do things differently if he had a do-over? I hear all the time about why people don’t want annuities. I have not heard much from people who bought one and then regretted it.

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