Should You Consider Making Your Own Annuity?

Advisors often suggest that investors build things such as bond ladders, portfolios and estate plans.

But you can also build your own annuity.

An annuity is a contract between an investor and a life insurance company.

You make a payment to the life insurance company, either in a lump sum or in a series of transactions, and in exchange the life insurance company offers you an ongoing stream of income at some point in the future.

One type of annuity, the fixed annuity, is designed to provide guaranteed regular payments to the policyholder over the term of the contract. That’s appealing to many investors because fixed annuities promise guaranteed income payments in good times and bad.

Investors who have purchased them don’t have to worry about market volatility.

You can also build your own annuity, however.

Say you have $100,000 to invest in a deferred annuity that matures in five years.

You might invest $89,500 in five-year U.S. Treasuries, with recent yields of around 2.25%, and the remaining $10,500 in stocks via an S&P 500 Index fund.

At the end of five years, the five-year U.S. Treasuries will return $100,000.

If the stocks maintain their value, you’ll end up with $110,500. If the stocks lose half their value you’ll end up with $105,250. If the stocks gain 9%, you’ll end up with $116,200.

Of course, this example is hypothetical, but it does illustrate the concept. In each case, there’s a guaranteed return, there’s a potential profit and you hold the cash, not the life insurance company.

That said, assembling your own annuity-like investment can be tougher than it looks, so you may just prefer to stick with a fixed annuity. If so, your advisor can help you choose one.