The current investment climate makes buying an annuity difficult, because interest rates are so low companies are not offering big payout rates. Most immediate annuities pay a fixed rate of return, and while some states set a minimum allowable rate — 3 percent in Massachusetts — the income a fixed-rate annuity can provide is still highly dependent on economic conditions at the time of purchase.
“The payment of your annuity is going to be influenced by the current rate environment,” Spoto said. “So when interest rates are low, like they are now, that does not spell good news.”
To get around this, some financial advisors recommend a practice known as “laddering” in which investors buy a series of smaller annuities at intervals. This gives regular income at the outset, and allows investors to wait until interest rates improve and get a better deal with a later annuity.
Investors need to be careful shoppers for annuities, considering only those from highly rated companies, and paying attention to small differences among offerings that can add up to significant money over the decades, said Webb.