IRA and 401(k) drawdown: Just tell me what to do for immediate annuities

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(MoneyWatch) My previous two posts offered simple, actionable advice for generating lifetime retirement paychecks from your IRAs and 401(k) accounts. One takeaway: Consider equally dividing your retirement savings between an inflation-adjusted immediate annuity and managed payouts. This post will wrap up the series with similar "just tell me what to do" suggestions for the best ways to buy the annuity.

For the portion of your retirement savings that you'll use to purchase an inflation-adjusted, immediate annuity, use an annuity shopping service such as Hueler's Income Solutions (available through Vanguard) or ImmediateAnnuities.com. These online shopping services enable you to buy annuities at a competitive price and with low transaction charges. Another benefit: You won't have to pay a large commission to an insurance agent, who may also try to talk you into costly insurance riders.

IRA and 401(k) retirement drawdown: Just tell me what to do!
IRA and 401(k) retirement drawdown: Just tell me what to do for managed payouts
IRAs and 401(k): Maximize retirement income with immediate annuities

Check to see if one of these online annuity shopping services are available through your savings plan at work; if so, you can use your employer's plan for this purpose. If these services aren't available through your savings plan at work or if your retirement savings are in an IRA, you'll need to make arrangements directly with the annuity shopping service, which can guide you through the process.

If you want to squeeze a little more retirement income out of your savings, you could opt for an annuity that increases at a fixed annual rate of 3 percent, instead of increasing your retirement paycheck for the inflation rate as measured by the Consumer Price Index.

If you're married or are in a committed relationship, buy a "joint-and-survivor" annuity with at least 66.6 percent continuing to your spouse or partner after your death. You may want to elect a higher continuation percentage, either 75 or 100 percent, to give your spouse more security after you pass away. Understand, the higher continuation percentage you choose, the lower your monthly annuity income will be.

Make sure you tell the insurance company that your savings are coming from an IRA or 401(k) plan. This way, you won't be taxed on the full amount of your savings when you buy the annuity; in this case, you're taxed on the amount of monthly retirement income you've received during the year.

Remember those pesky required minimum distribution rules at age 70-1/2 that I described in my last post? The IRS hasn't resolved how they apply to immediate annuities, but they are unlikely to apply to the amount of your retirement savings used to buy an immediate annuity. You'll want to check with your insurance company and tax advisor to make sure you comply.

It's important to understand that once you buy this type of annuity, you can't change your mind and ask for your money back.  And there will be no money left over for a legacy after you and your spouse or partner die. That's the price you pay for the important advantages of an immediate inflation-adjusted annuity. That is, you'll neatly take care of two significant retirement risks -- the risk of outliving your money, and the risk of inflation eroding your retirement paycheck. That will help you relax and enjoy your retirement.

I'll readily admit that you might be able to find retirement income solutions that are more appropriate for your goals and circumstances, compared to the "just tell me what to do" recommendations in this series of posts. But that will require you to spend some time figuring out the strategy that best fits your goals. Or you'll need to hire a financial planner who's qualified and has your best interests at heart. Finding a competent, trustworthy planner also takes time and effort.

While I still advocate that you should take the time to do the job right, the strategies I've outlined in this series of posts are the next best thing. You won't screw up by adopting these strategies, and there's a very good chance you'll hit your 80s and 90s with your retirement paycheck still chugging along.

Photo courtesy of iStockphoto contributor petdcat

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    Steve Vernon helped large employers design and manage their retirement programs for more than 35 years as a consulting actuary. Now he's a research scholar for the Stanford Center on Longevity, where he helps collect, direct and disseminate research that will improve the financial security of seniors. He's also president of Rest-of-Life Communications, delivers retirement planning workshops and authored Money for Life: Turn Your IRA and 401(k) Into a Lifetime Retirement Paycheck and Recession-Proof Your Retirement Years.

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