Options for the Elderly to Live with Today's Ultra Low Interest Rates

Based on yesterday's Fed statement that "economic conditions [...] are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013", those who depend on interest from their savings are faced with some tough choices. It's likely that CD rates will stay low for a long time. The low CD rates may force seniors into going back to work to make up for the loss of income. In my yesterday's FOMC post, the reader Mary Grace commented about the situation of her neighbor:

My 86-year old neighbor just went back to work, believe it or not Burger King hired her, 22 hours a week to wipe tables and fill the napkin dispensers, etc. She used to be a teacher in a private school but of course can't do that any longer. Never married. She went back to work because she gets very little soc. security, no pension. She has $425,000 in CD's (I know because I help her with her affairs) but now they throw off very little interest, maybe $1,000/month, taxable. Not enough for her to live on with medicine, heat for her home, etc. If she could get 5% again, she could enjoy her retirement and not wipe after teenagers at the Burger King. This country is very messed up right now. She can't understand why all her scrimping and saving still wasn't enough.

The reader doubleR provided some useful suggestions for Mary's neighbor:

To Mary Grace: Based on her advanced age, your neighbor should consider a single life immediate fixed annuity for at least a portion of her savings. The downside is that it removes that amount of savings she could leave to a loved one when she dies but at her advanced age if she took half her savings, say $200,000, she could probably get about $2,600 per month from the annuity. Or if she was willing to use $300,000 for annuities, she could probably get about $3,900 per month. That would still leave her a reasonable amount of savings. But she should probably not put more than $100,000 with any one insurer to spread the risk and stay under the protection provided by most states in case an insurance company where to go belly up. She deserves to use that money for her own enjoyment rather than leaving it to someone else when she dies since she worked so hard to scrimp and save it. Otherwise some banker is enjoying the fruits of her savings instead of her.

The suggestions of doubleR make sense. Here's what Clark Howard says about immediate fixed annuities:

Most annuities have massive commissions and massive expenses. That's why they're pushed by commissioned salespeople, especially those in banks who target customers complaining about low CD interest rates.

But there's one annuity that may be a great deal for a lot of people. It's called an immediate payout annuity (aka life annuity).

As doubleR describes, one downside of an immediate fixed annuity is that there will be less for your heirs if you die early. As Clark describes, you can choose policies with guaranteed payouts but the tradeoff is that your monthly benefit will be reduced. Another downside is that your money is locked into the annuity. Unlike most CDs, annuities may not have early withdrawal options if some emergency arises. That's one reason not to put all of your savings into an immediate annuity.

You can see how much income you can get with immediate fixed annuities at www.immediateannuities.com. I plugged in an age of 86 for a Florida female with a dollar amount to invest of $100,000. The largest estimated monthly income returned was $1,293/month ($15,516/year). This was a single life income with no payments to beneficiaries. If you want something to be left to beneficiaries, there are options with smaller monthly income payments. One example was a single life income with up to 10 years paid to beneficiaries. This had an estimated monthly income of $849/month ($10,188).

How can an immediate annuity pay over $15K per year on a $100K policy? The older you are, the higher the monthly income. This is because the insurance company will keep all or a significant portion of the investment when you die. If you plug in the age of 66 instead of 86, the top monthly income goes down to $603/month ($7,236/year).

The other reason why the immediate annuity income can be so much higher than CD interest is that the income includes some principal.

One thing to remember is that like CD rates, the monthly income from immediate annuities is dependent on the interest rate environment. Today is not the best time to lock into immediate annuities. The monthly income payments will increase when rates rise. But if you are up in age and need money in the next 10 years, you have less time to wait for higher rates which could take several years.