- Invest your savings, and spend just the interest and dividends.
- Invest your savings, but draw down principal cautiously so you don't outlive your assets (the "managed payouts" form of generating income).
- Buy an immediate annuity from an insurance company.
Here's a summary of those ratings to help you sort out which method, or combination of methods, might work best for you:
As you look at this chart, you'll notice that each method has its advantages and disadvantages. That's one reason why you might want to use a combination of methods and/or change methods as you age.
As you might expect, there are nuances and exceptions to the above ratings that don't fit neatly in a small box. Here are some footnotes:
- With immediate annuities, you can have the potential for growth in income if you buy an inflation-adjusted annuity or a variable annuity. The "no" answer is for the most common variation, which is a fixed annuity.
- Regarding the potential for investment risk, with interest and dividends and managed payouts, your potential risk depends on your asset allocation between stocks and bonds. And if you buy a variable annuity, you'll be subject to investment risk; the "high" answer shown above is for fixed annuities.
- When it comes to protecting yourself against longevity risk -- the risk of outliving your assets -- your risk with managed payouts depends on how rapidly you're drawing down principal.
Image from iStockphoto contributor kycstudio
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