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Much Better Payouts Than the 4% Drawdown

Most of the major news publications have published articles about annuities recently, and the Boston Globe is no exception.  In “Annuities regain a bit of luster as retirements get longer,” Lynn Asinof talks about how many annuity products are finding new fans as people live longer.  As annuities are becoming increasingly popular in retirement planning, more and more people are using them and talking about them with friends and family.  High fees and low returns are the main reasons that people disapprove of using annuities, but they are doing further research to understand the costs and the great benefits as life expectancy, and therefore retirement length, increases.

In the search for a lifetime income that will last as long as they do, people are turning more and more to annuities.  The government has been working to make them more attractive in retirement as pensions become non-existent and Social Security’s future is unclear.  The reason that annuities are good as part of a retirement plan is that once you pay your lump sum of money, you have guaranteed income payments.  Although you often give up control of that money and the ability to leave your income to your heirs.  That isn’t true with all annuity products, however if you pass on death benefits or eliminate surrender charges you will pay more for those benefits.  With the large array of annuity products available, there are many different guarantees, fees, and payouts from which to choose.

Low-cost, single-premium income annuities are recommended as the basic product for guaranteeing lifetime income.  Use this product’s income as a bridge between other retirement income and the expenses you will have for retirement.  Invest other assets into accounts that you can leave to your heirs upon death.  The article uses an example of a 65-year old couple looking to receive $25,000 yearly to bridge their retirement expenses and their pension and Social Security payments.  By withdrawing 4% to come up with that money yearly, they would need a $625,000 portfolio.  And that money isn’t guaranteed, especially if it is in stocks.  Using immediate annuities to finance the same $25,000 a year, they would only need $445,000 because they could get a payout of $5,630 from each $100,000 annuity.

This is for a couple; a single annuity would pay out significantly more.  The reason that annuities pay more is that those who die early make up the payments for those who live long.  While this turns many people away from annuities, it is actually just purchasing insurance against the fact that you will outlive your money.  This is why you shouldn’t invest all of your portfolio into annuities.  Around one-quarter of your portfolio is often recommended for annuities.  There are products to account for inflation, or a certain period of time if you are worried about dying prematurely.  It’s wise to ask a financial professional about annuities because they can be complicated and you might not be properly calculating your longevity risk on your own.

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