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Using an Immediate Annuity for Retirement: 4 Different Ways

As we are always stressing here at Annuity FYI, there are both good annuities and bad annuities.  In Steve Vernon’s article for CBS News’ Moneywatch, “The best way to buy annuities for retirement,” he says that annuities hold an important place in your retirement planning efforts.  Since they can be complex, it is worth the time spent to research exactly what product will be right for you.  One week of Mr. Vernon’s series, “16 Weeks to Plan Your Retirement,” focuses on how to buy an immediate annuity with a lifetime income guarantee.

Immediate annuities offer four different choices.  They can have a fixed dollar amount, they can adjust for inflation, they can have variable returns, or they can offer a Guaranteed Lifetime Withdrawal Benefit (GLWB.)  This is sometimes known as a Guaranteed Minimum Withdrawal Benefit (GMWB,)  The first two types of annuities give you a fixed payment that will not change based on how the markets perform.  Although your payment will increase with an inflation-adjusted immediate annuity, the increases are pre-determined and cannot be changed.  The author says that online tools are good for comparing these immediate annuities and can give you multiple carriers from which to choose.

Variable annuities change with the markets, meaning that your payment could either go up or down.  Your particular return is based on underlying stock and bond portfolios, but you can change your allocation of funds in these portfolios after the original annuity purchase.  Mr. Vernon recommends around 1/3 to 2/3 of your funds be invested in stocks.  If you are interested in an immediate annuity with a GMWB, the article suggests finding one with a strong investment performance combined with low investment management and guarantee fees.  His recommendation is an annuity with investment management fees at or below 50 basis points and insurance guarantee fees at or below 100 basis points.

Keep in mind that many 401k plans offer annuity purchases through their plan that could get you better deals than going out there on your own.  This is always worth the first look just to see if their annuity might be right for you.  You could be using the income from your annuity purchase for decades, so spend a week or two doing your homework to make sure that you buy the right one.  If you have any questions or confusion, it is best to hire a financial professional that is unbiased to help you through the annuity purchase process.  The retirement income that you will get from an annuity will carry you through your lifetime in a safe and reliable way.

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