How retirees can create a paycheck with annuities
ments are so low.
There are three major downsides to immediate annuities. The first is flexibility. Once you give No question, these are tough times for retirees your money to an insurance company, you usually who don’t want to take much risk with their portcan’t get it back (although some will let you take a folios. Bonds, cash and other low-risk investments one-time withdrawal for emergencies). That’s the are delivering such paltry returns that money reason most planners recommend investing no invested in them won’t even keep pace with a low more than 25% to 30% of your savings in an annurate of inflation. ity. The second is that payments usually aren’t
One alternative is to invest a slice of your savadjusted for inflation. You can buy an annuity with ings in a single premium immediate annuity. In an inflation rider, but it will lower your initial exchange for a lump sum, an insurance company payout by about 28%. will provide you with a monthly payment for a The third — and currently most significant — specified period of years or the rest of your life. drawback is that low interest rates will depress You receive the largest amount each year with a your payouts, effectively making annuities more life-only annuity, which stops payouts when you expensive now. Payouts are usually tied to rates die. If you’re married, you also have the option of for 10-year Treasuries, which now are at a record purchasing a joint-life annuity, whichlow.willreduce your payout but continue to provide income as Even with that caveat, annuities may still delivlong as either spouse is alive. er a better return than you’d get by investing in
Immediate annuities are particularly appealing fixed-income investments, because the longer you if you’re worried about bear markets, because if live, the more you earn. That’s because annuities the monthly annuity payments cover your basic also provide mortality credits. When you buy an expenses, you can leave your stock investments annuity, the insurance company pools your money alone until the market recovers. An immediate with that of other investors. Funds from investors annuity also could enable you to invest more of who die earlier than expected are paid out to the your savings in stocks — an important considerother annuity holders. ation when returns from fixed-income invest- If you think interest rates will be headed up, one option is to create an annuities ladder. Instead of investing the entire amount you want to annuitize at once, spread your investments over several years.
For example, if you want to invest $200,000, you would buy an annuity for $50,000 this year and invest another $50,000 every two years until you have spent the entire amount. That way, the payouts will gradually increase as you get older, and if interest rates rise, you’ll be able to take advantage of them.