Finding Income in Retirement
An immediate annuity offers a guarantee for those fearful of the stock market
In the decade since she retired as an administrative secretary for a local school district, Hope DeSales Caines managed to make ends meet through a combination of a modest pension and Social Security. But recently, the Maple Shade, N.J., resident discovered that as the cost of living has risen, her income has not. Caines, 74, concluded that she needed to supplement those checks with the personal savings she cobbled together during her working years.
Related News
Annual Retirement Guide
The pressure is on baby boomers saving for retirement
Major companies are recruiting older workers
Diet, exercise, and checkups will add years to your life
Looking for the good life in all the small places
Caines was fearful of making the same mistake that friends had: losing money in the stock market. For retirees, the margin for error can be quite slim. Academic research shows investors can afford to withdraw only 4 to 5 percent of their savings annually if they want to be certain the money will last 30 years or more. And that's if you invest those assets soundly. "I always felt I worked hard for the money, and I didn't want to lose it," Caines says.
So instead of simply tapping her retirement accounts, last year she used a portion to buy a fixed immediate lifetime annuity through New York Life that promises to pay her income for life.
Immediate annuities have gotten a good deal of attention lately. As part of his plan to revamp Social Security, President Bush has broached the idea of retirees' purchasing annuities with money earned in the private investment accounts he favors.
Bum rap. Today, very few people choose to turn their 401(k)'s, IRA s, and private brokerage accounts into annuities at retirement. Part of the problem is that some associate the term annuity with variable deferred annuities, a combination life insurance and investment product that's often pushed by agents who work on commission and reviled by many cost-conscious financial planners.
But fixed immediate annuities are a different matter. While a variable annuity is a tax-deferred account used to accumulate assets for retirement, a fixed annuity is a tool designed to produce stable income during retirement. "People have historically benefited from a couple of different types of immediate annuities," says Harold Evensky, chairman of the financial planning firm Evensky & Katz.
These include traditional pension plans once offered by many companies. The other is Social Security itself. "The former is disappearing, and the latter is shrinking," Evensky says, adding that privately purchased "immediate annuities are going to play a hugely important role in workers' retirement plans."
In its simplest form, a fixed annuity is an insurance contract that promises you a set amount of annual income for life--no matter how long that might be. Think of it as your own pension plan. In exchange for a lump sum of $100,000, say, an insurance company promises to pay you $7,000 to $8,000 a year for the rest of your life. That's great if you buy one at 65 and live to 90 or older, since you will receive far more in payments than you put in. But should you die earlier than expected, the remainder of your initial payment belongs to the insurance company.
advertisement
