Looking for a lovable annuity? Try these

Don't be deterred from considering annuities because of the bad rap that the kind called deferred variable annuities get or by people who say they hate annuities. As you approach retirement, you should consider certain kinds of annuities that pay you a lifetime paycheck, no matter how long you live, which protects you against outliving your money.

That's a valuable feature that many people need to keep in mind when planning for retirement.

As you approach your retirement years, your focus should shift from investing and accumulating wealth to generating a lifetime retirement income. For these purposes, let's distinguish between the situations when an annuity might not be appropriate and when it might be.

When an annuity might not be appropriate

Let's say you're retiring and don't have very much retirement savings, say, less than $100,000. You might want to avoid annuities and instead use that savings as a cushion for emergencies and possibly to allow yourself to defer starting your Social Security benefits (a smart strategy than can improve your retirement security).

On the other end of the spectrum, if you're a successful investor who can live in retirement on the investment return from your savings without touching the principal, or with very modest withdrawals of principal, you may not need to buy an annuity to protect yourself against outliving your money. To be in this fortunate situation, you'd need a million or two in retirement savings.

When an annuity might make sense

In my opinion, retirees with roughly between $100,000 and $1 million in retirement savings are the people who should consider using a portion of that savings to purchase an annuity that provides a lifetime retirement paycheck. This savings range describes many middle-income retirees.

One strategy that I like is to cover your basic, essential living expenses with a combination of Social Security, an employer pension if you have one and a competitively priced low-cost immediate annuity. That way, if you live a long time or the stock market crashes, you won't need to move in with your children because you'll still have income coming in.

Then invest the remainder of your savings to cover your discretionary living expenses and fund a legacy, if that appeals to you.

What types of annuities should you consider?

Now let's talk about a type of annuity that I love: a simple immediate annuity that pays a monthly paycheck no matter how long you live. It can be fixed in dollar amount or indexed for inflation, depending on your specific spending needs. It may go by the name "single premium immediate annuity," or SPIA. Buy it as cheaply and transparently as possible through an annuity bidding service such as Income Solutions or ImmediateAnnuities.com.

Another type of annuity I love is an employer-sponsored defined-benefit plan, either a traditional pension plan or a hybrid cash balance plan. These plans will also pay you a monthly retirement paycheck no matter how long you live. Employers operate these plans on a nonprofit basis for the sole benefit of their employees, and the terms are usually very cost-effective compared to any other similar retirement instrument.

Some of these employer-sponsored plans offer a lump sum payment in lieu of the annuity. The bad rap that other types of annuities have received often misleads people into taking a lump sum from their retirement plan, thinking that if they get all their money upfront, they can invest and generate a higher retirement income.

But that's a shame, because it's not usually the best move you can make. Some financial planners will also urge people to elect the lump sum and then invest it with them, capitalizing on the poor impressions that annuities may have. The high-priced, complex, poor performing deferred variable annuities really give all annuities a bad name.

Other annuities to consider include longevity insurance, which starts your lifetime income at an advanced age, such as age 80 or 85. Until that age, you draw from other investments to replace your paycheck. You might also consider a deferred fixed annuity that delivers a fixed, lifetime retirement income in the near future. It's a way to build a personal pension.

By the way, the trade-off you often have to accept for the above valuable types of annuities is that at some point, your decision to purchase an annuity can become irrevocable -- you won't be able to change your mind and get all your money back. In my opinion, that's an appropriate price to pay for receiving a guaranteed income that you can't outlive.

And it's often the case that you can receive a higher retirement income with an immediate annuity, compared to other approaches to generating retirement income.

You may be offered an annuity in your employer's 401(k) plan that provides institutional price breaks and lets you withdraw your money after the income starts. These annuities usually go by the name "guaranteed lifetime withdrawal benefits" (GLWB), and they also deserve your consideration.

As you can see, the situation regarding annuities is more nuanced than simple blanket statements about love and hate. Be sure to spend adequate time doing your research and shopping for an annuity that best fits your circumstances. It might take the same amount of time -- or more -- that you'd spend shopping for your next car.

But which task is more critical to your retirement? Chances are good that you'll find retirement income generators that will last as long as you do -- and longer than your next car!

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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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