About Ken Tumin

Ken Tumin founded the Bank Deals Blog in 2005 and has been passionately covering the best deposit deals ever since. He is frequently referenced by The New York Times, The Wall Street Journal, and other publications as a top expert, but he is first and foremost a fellow deal seeker and member of the wonderful community of savers that frequents DepositAccounts.

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


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.

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Anonymous   |     |   Comment #1
It is her money---they are paying 3 1/2% at Apple FCU for a 10 yr CD or 3% at Navy FCU  on a 7 yr CD--or 3.25% at IGO Banking--so just open a 10 yr Cd and she gets some int.?! OR just use a little each month from her 425K to supplememnt her current income--andspend it down or put 1/2 in a CD and use 1/2 to supplement income. What you are thinking int. rates are going to go up??
Anonymous   |     |   Comment #2
The SPIA (single premium immediate annuities) are for someone who is willing to part from his/hers money forever in exchange for monthly income, which can vary by: present interest rates, age, ****, guaranteed period prior to death, single life or double, COLA (cost of living adjustments) and other factors.
It is not for everyone who needs income, because if in poor health, you are actually gifting the insurance company with your life savings should you die shortly after purchasing such annuity, For every security option chosen from above, your monthly income is lowered proportionally and if COLA chosen, you will receive 1/2 of the money for the next 10 years or until you catch up with the inflation rate.
It is not easy decision and nobody should purchase SPIA unless consulted the immediate family members, CPA, existing estate of record and the mind of the person purchasing the annuity, because there is no reversal and nobody can revoke the deal once signed.
me1004   |     |   Comment #3
One warning on these: unlike bank accounts, these are no FDIC protected. If the company goes under (remember AIG!), you lose all, just like in bonds or stocks. 

I will admit, I don't fully understand these things. Yet, is it really a better situation to hand your money over to some company that might go bankrupt but give you $15,000 a year if they don't, rather than merely withdraw 
$15,000 a year from your $100,000? The withdrawal route would get you about 7 years if you got no interest on it at the bank, but with the interest, you would have to expect at least 8 years. That gets you to age 94. Some people live beyond that - but only very few. Only if you lived beyond that would you get more from the annuity than you would by just leaving the money in the bank. And the bank is FDIC insured, and your money would remain available to you as needed in the meantime. I don't see how these annuities are a benefit. In fact, I'll bet there are all kinds of details to consider -- for instance, do you (your estate) get back the principal if you die, like you do in a bank account?
Anonymous   |     |   Comment #32
Insurance companies are back by the states guarantee insurance association up to 300k for annuities. The fdic actually has an F rating with rating companies because it only requires the bank to hold 20% of your money and can loan out 80%. If people truly started to get worried about their money and people wanted to get it out of the bank, there could be serious problems there. In regards to the AIG comment, AIG never missed one annuity payment nor death benefit payment in that situation.
Anonymous   |     |   Comment #33
Not all annuity types are fully covered. Some may not be covered due to the convoluted way some are set up. Most people think an annuity is a simple monthly payout based on an amount of money earned, invested, etc. Traditional retirement pensions are usually simple annuities. Today, there are many different forms of annuities and the buyer better read AND understand the fine print. There's a reason these contracts run 20-30 pages in length. Typical retirement annuities consist of, "choose a spousal option, pick a withdrawal amount (if allowed) and sign here." The check's in the mail.

People holding large sums can, with a bit of planning and discipline, effectively build their own annuity.
Anonymous   |     |   Comment #4
Common sense.   Stick with the long term CD. 
Bob (anonymous)   |     |   Comment #5
Some of those credit unions mentioned by #1 may not be available to all.  Plus, 3% on $425,000 still makes her work at Burger King.  Remember, that's taxable income.
Anonymous   |     |   Comment #6
I am no expert on ths, but can someone please explain why immediate annuity is attractive given the following:  If You purchase an annuity for $100, 000, that money is no longer yours and you can never get it back.  If you are age 66 and they "give" you 6%, you get $6000 a year of your own money back.  It would take 16.7 years for you to get back your own $100,000, so you would then be 83 years old.  Only after age 83 would you start to get more than you put in if you never made a penny of interest on the money, but certainly you would have gotton some interest over the years, say another $24,000??-so you would be able to take your $6000 ayear through age 87.  Is it worth giving away the $100,000 at age 66 now to get money form the insurance company afte age 87?  The older you are, seems the less sense it makes.  If I am wrong, please explain
Bozo   |     |   Comment #7
I'm not a big fan of annuities. Essentially, you are buying a "reverse" life insurance policy. Kinda like those "reverse mortgage" deals. The only annuity I would consider would be a delayed annuity, aka "longevity insurance", which kicks in at 90 years of age. If your SWR is conservative, you'll probably die before you run out of money.

Annuities are extremely profitable for insurers. Boomers totally freaked out over Mr. Market these days should consider a CD ladder, even with these pathetic rates.


Maecl   |     |   Comment #8
I also know little about annuties, but I do know you have to be careful.  They can have large fees and commissions.  Stay away from banks, and commission advisors.  Vanguard is a low cost company to look into.
Anonymous   |     |   Comment #9
This is sad. Assuming she lives to be 100, and she can’t get one penny of interest from the banks, she would still have 30K a year just from her cash capital. Add that to what social security and interest she can get, she should be quite comfortable. I always think it’s a disease how old people hoard their wealth “for the next generation”. That mindset leads them to support policies to impoverish other people’s children while enriching their own. In her case, is she saving the 425K so she can be buried with it? She owns a house, she has substantial savings, and there’s a range of social safety nets to help her if she runs out of resources. She is extremely fortunate. I believe in saving for retirement, for my quality of life, not for the balance sheet at my death.
dbl118   |     |   Comment #15
#9 has it right.  I don't see what the problem is.  She has plenty of money.  If $425,000 isn't enough money for her, she should never have retired I assume 20 years ago.  Certainly as somebody that has been invested in stocks and bonds since the 50s maybe, she has nothing to complain about.  America has clearly been living beyond its means for many years now, and overall returns have been good during her lifetime.

As a private school teacher living on her own with only one income, she probably didn't save that much money.  It sounds like she retired based off the expectation of the market always going up, CD rates always being high, or something like that.  I'm not trying to be rude, but it sounds like the non5% rate is being blamed.  The country might be f*ed up now, but that's only because it's been f*ed up in OUR FAVOR for so long.  She is choosing to go back to work, but it is a choice.  I neither have animosity nor sympathy for her.  My sympathy is for the 2009 still unemployed graduates who will be left behind for decades due to irresponsible government and bad timing (of being born) on their parts.
Maryelaine CPA
Maryelaine CPA (anonymous)   |     |   Comment #10
Re: #9, I don't think that it is "hoarding" to want a bank acct. of $425,000.  She could live to 100 or later.  Plus, there's always unforeseen issues, and maybe she wants to leave money to her family, nieces, etc. or help with college expenses. Maybe her roof needs fixing, or she wants to take a trip? Maybe she needs some surgery that is not covered by any plan? And the comment re: social safety nets -- Who is this poster kidding?   Who wants to be dependent on some agency because you are 95 and your money ran out?   Everyone wants some independent resources.  I think that it is unrealistic to try and time it so your money runs out when your time is at hand.  I totally disagree with that post.  Sorry. 
Anonymous   |     |   Comment #11
To the commenter making judgments about why the elderly lady wants to conserve her resources --- I suggest this is no place for judgments but rather for suggestions for the lady to the meet the desired financial goal without judgments as to why she wants to hold onto her resources!!!

I applaud the comments by CPA commenter #10.  I am not a CPA but she is right on the mark!!!!
Anonymous   |     |   Comment #12
The idea of passing on with "0" money, as suggested by #9, is ridiculous.   A nest egg is security for people.  My grandmother ran out of money at 92.  Let poster #9 eat the stale govt. cheese and deal with the rude, condescending social workers that my grandmother had to deal with because she had run through her nest egg.   I agree with the CPA lady and #11. 
Anonymous   |     |   Comment #13
the FEDERAL RESERVE has destroyed int income for seniors.We are starving, When i was 6 yrs old i got 5% on my Christmas club.The fed wants everyone to buy stocks but seniors cannot and should not take this risk.it has been 2 yrs no int in the bank and PRES OBAMA wants to extend unemployment to 3 yrs, I am sorry to be an AMERICAN SENIOR A FORGOTTEN PART OF AMERICA
niniss   |     |   Comment #14
To poster #12, I don't understand why your grandma had to "eat the stale govt. cheese and deal with the rude, condescending social workers," she had (or has) you and your parents, not?  My mother doesn't have a penny of her own, but she doesn't take a penny from the gov't because she has me and my brothers to take care of her.  This country/culture is so messed up, I'm sorry to say.  
shinoby   |     |   Comment #16
#14 Nailed it.  I cared for both my mother and my dad at the ends of their lives.  For several years it was 24/7.  Neither ever went into a "home" or had to rely on the government.  It was a great privilege for me to be able to do this.  I never got to pay them back for all they had done for me, but I was at least able to do something for them and help them when they badly needed help.

Given this lady, at her age, is able to put in 22 hours of work each week, we have to assume her health remains decent.  This offers some indication she will enjoy a long life . . uh . . an even longer life I should say.  She should work for as long as she wants to and is able, then spend down her nestegg without hesitation.  She should not, in these terrible times and given her circumstances, be worrying about the next generation (family, I mean, if she has any family members).  They, if any exist, certainly don't appear to be worrying about her.

Finally, this story presents a great opportunity to give a shout out to Ben S. Bernanke:

Thanks, Ben, for taking such good care of this lady and America with your asinine and outrageous policies.

BTW, Ben, we all know the "S." stands for "skunk"!  
pearlbrown   |     |   Comment #17
#14 niniss and #16 shinoby nailed it.  I have (am still am) looking after all the seniors in my family.  It is an affirmation of family unity as well as a small way of thanking them for everything they have done for me, although that can never be repayed in the least.   

As to the safety net(s) referred to by #9, it (they) exist - but good luck trying to fall safely into them.  I do volunteer work helping seniors find resources when they have run out of money and see firsthand that the safety net ia full of holes and exists largely in name only.  It requires stamina and the stomach to persevere through the roadblocks, the calls not returned and the incredibly complex guidelines - at a time when the senior's faculties are waning, and their health is deteriorating. 

I applaud the lady's courage and commitment to providing for herself for as long as possible.  

Anonymous   |     |   Comment #18
Please people, she need answers not criticisms.  Today's environment is what it is and she will have to deal with it.  First, stay away from annuities.  Second, ladder in two 5 yr CD's at a bank with low penalty for early withdrawal.  Third, look at Vanguard GNMA's with a ticker symbol (VFIIX) which currently yields approx 3.17%.  Fourth, continue to work as things certainly could be a lot worse and are for some elderly.
Anonymous   |     |   Comment #19
#18 is absolutely correct. 

However, we should all remember that the problem that this woman faces is analytically identical to the problem that EVERY conservative saver faces. It's tempting to have more sympathy for her (because of her age, and the fact that she needs the interest income now), however the reality is that we all are watching our savings stagnate -- while the cost of living continues to rise (and the US dollar declines).

A lethal combination of taxes and low real interest rates have penalized savers in the USA for the past 40 years. At the same time, government policies rewarded people who borrowed money and acted irresponsibly. 

There's nothing that can fix this woman's problem today. However, the long-term solution for this woman (and all of us) is:

1) Stop the government's irresponsible and unsustainable deficit spending policies.

2) Fix the tax code and impose a flat income tax rate (and perhaps a VAT tax)  that encourages savings, investment and capital formation. That will eventually create jobs and growth.

3) Change the Fed's dual mandate. They should have one job only: To target a stable inflation rate and stable US dollar. They should not be playing games with QE1...QE1000 ... or making promises about future interest rates. The dollar is at an all-time low against the Swiss Franc, the Yen, the Canadian Dollar etc etc ... and that's tantamount to a declining standard of living for all Americans.

Ultimately, we'll all be much worse off than that woman when we retire -- unless these sorts of critical structural changes are  made....
Maecl   |     |   Comment #20
To #19

No to a VAT tax.  The left would love that.  We would never know the the tax that is built into a product.  I want to know exactly what the tax is.  We don't want to be more like Europe.

Maybe a flat tax or a national sales tax.  With the sales tax everyone not paying now would have to contribute.  That includes criminals.
Rosedala (anonymous)   |     |   Comment #21
Hi All...there are many types of annuities and I'm surprised no one mentioned CD-type, fixed annuities where the principal doesn't fluctuate and they don't have to last 30 years or more!  They are for certain years just as bank CDs, during which the interest rate remains intact until maturity at which time one gets one's entire principal plus all interest earned AND deferred tax until maturity withdrawal. And though i haven't used it yet, I understand there's a Form (don't recall # now) with which you can transfer the annuity to another annuity in same or another institution... without getting 1099!!!

The interest rates offered are only AFTER all fees, commissions, etc. are taken, so one receives on maturity the exact amount calculated at time of buying it.  At least that has been my experience during the years I've been buying them.  It's simple and it pays more than bank CDs for the years one chooses.  The only thing one must be careful with is the rating of the insurance company that sells them.  Also, you can take out the interest if needed without penalty. 

While I was one of the fortunate persons to get 6% at Penfed IRAs, it'll mature in 3 months and to have to go for 10 years with a two something percent at a bank CD is too bitter a taste! lol!  A 10-year annuity may give you 4% at this stage of the national game, although shopping around, just as with bank CDs, may do better.

I have at present (and had in the past most satisfactorily) annuities with Jackson National Life Ins. Co. of NY (sold thru some private agency in Florida), if anyone is interested.  I have two 8 or 10-year annuities at 5.66%.  Another one with ING (sold thru "Reliastar Life Ins. Co. of NY") for 5 years at 5.05%, a lower rate because I bought it recently when things are so down...No fees or whatever.

I think these make a great interim investment until our national situation comes back to normal don't you think? :)   


Anonymous   |     |   Comment #24
Lately I've been thinking about the new (as of Jan. 1, 2011) estate and gift tax laws, and also purchased a book about Medicaid planning.  Briefly, anything you give away 5 years or more before applying for Medicaid does not count as Medicaid assets (the "lookback" period).  The gift tax laws also allow you to give away up to $5 million during 2011 and 2012 without incurring gift tax, but you do have to file a form 709.  Some people use irrevocable trusts instead of gifting.  So if the goal is to leave an estate,  and you've got 5 years at least before needing nursing home services, there are ways to do so. 

I also care for my bedridden elderly mother at home, with another family member.  It's great if you can do it, but there are circumstances where it is impossible due to the person's catastrophic problems, unless you employ 2 24/7 nurses.
Anonymous   |     |   Comment #31
Yes, make the rest of society pay the nursing home bills while inheritors enjoy the beach life.
Anonymous   |     |   Comment #34
Like Medicare, Medicaid/Medi-Cal have been paid by each of us over our working career....don't leave money on the table if one can qualify for Medicaid/Medi-Cal...and I hear that SPIA is one way.   Anyone have info on SPIA for qualification?
Anonymous   |     |   Comment #25
Everyone should pull their money out of the banks. Then they would have no money to loan causing interest rates to rise or banks to fail. Nobody would care if banks fail if they had no money there and rates would skyrocket if they wanted our deposits again.
niniss   |     |   Comment #26
Annonymous #25 - Hey i like your idea.
Jenna (anonymous)   |     |   Comment #28
I was completely lost as to where to go for fixed annuities to help my mother. We ended up going with these <a href="http://safemoneyalternatives.com/hot-topics/guaranteed-lifetime-income" rel="nofollow">fixed annuities</a> and are very happy with our choice.
Anonymous   |     |   Comment #29
I will admit, I don't fully understand these things. Yet, is it really a better situation to hand your money over to some company that might go bankrupt but give you $15,000 a year if they don't, rather than merely withdraw
Anonymous   |     |   Comment #30
Re-reading this thread (and I'm not selling anything) the point seems to be generally missed on an important reason to consider buying a SPIA (Single Premium Immediate Annuity) where there a community spouse (one at home) and institutional spouse (perhaps b/c of dementia) in order to qualify for Medicaid/Medi-Cal to pay for nursing home for the latter.  A Medicaid/Medi-Cal qualified SPIA "may" be a way for some to "park money."  Does anyone have any suggestions on insurance companies offering/selling SPIA that qualify for Medicaid/Medi-Cal?