Should You Annuitize Your Retirement Savings?
Don't annuitize all your assets. It isn't always easy to get your money out of an annuity for emergencies, at least without penalty. "If they have cash flow needs, are not in the greatest of health, or if they might need to retrieve the money they are investing in the near term, an annuity might not be the right product for them," Walter says. "As with other investments, you have to look at diversification and not put all of your assets into a particular vehicle like an annuity." It may be a good idea to keep some of your wealth outside of an annuity for health or other sudden expenses.
Factor in inflation. Some annuities will protect your retirement savings from the erosive effects of inflation, at the cost of lower payments upfront. "Don't be fooled by the lower initial payout," says Jeffrey Brown, associate professor of finance at the University of Illinois-Urbana-Champaign. "Over a lifetime, these products can be quite advantageous in terms of providing retirement security at advanced ages."
For example, a 65-year-old male who invests $100,000 in a fixed life annuity may receive payments of $687.96 monthly beginning 30 days after the initial investment. The same investment in a fixed life annuity with inflation adjustments will produce an initial payment of $500.30, but payments will rise as the CPI increases. Rothschild estimates you will start to see higher payments than with an annuity without inflation protection approximately 10 to 12 years into retirement but cautions, "If we have another period of inflation like we did in the '70s, you really want to be holding an inflation-protected annuity."
Find the correct amount to annuitize. You want the money you are getting in retirement from all sources to be sufficient to cover your everyday needs. "It would be good to have a steady stream of income that looks like three quarters of what I made when I was working," says William Gentry, associate professor of economics at Williams College. But an annuity is not the only way to have a financially secure retirement if you don't have a company pension or some other type of defined-benefit plan. Rothschild says, "Households can get the same kinds of asset control they can get with a fancy annuity product simply annuitizing less of their wealth and keeping some of it in mutual funds, CDs, or bonds."