Today’s Jean Chatzky Says to Consider Annuities for Retirement

The Today Show’s financial editor Jean Chatzky gets asked a lot of questions about retirement.  She recently held a live Twitter chat to answer retirement questions and her information was broadcast on the show.  In “Jean Chatzky’s 3 ways to make money last through retirement,” she addressed one of the most common retirement concerns.  People are worried about outliving their savings.  The three ways that she recommends to make your savings last are using annuities, drawing your money down or investing in stocks.  Using some combination of these is sometimes the best way to finance your retirement and create a stream of income that you cannot outlive.

By purchasing an immediate or longevity annuity with a portion of your retirement savings, you create an income stream, or in essence a paycheck that you’ll receive during retirement.  An annuity can pay you income for the rest of your life, your spouse’s life or a predetermined amount of time shorter than that.  Jean Chatzky warns consumers to look for an annuity that is simple and straightforward because some are too complex for even advisors to understand.  Make sure to ask about annual fees, surrender charges and other fees that could be associated with your annuity.  If you choose an immediate annuity, you purchase one at retirement with a single lump sum.  Your monthly payments are based on the age at which you start receiving the income, your life expectancy and current interest rates.  The older you are, the higher your annuity payments will be.  You can also take advantage of rising interest rates by laddering annuity purchases, or buying them at multiple points in time rather than all at once.  If you purchase a deferred or longevity annuity, you can make a lump sum or multiple payments and then start receiving income in the future.  These annuities work the same way; the older you are when you receive payments, the higher the payments will be.

Another option to make your money last during retirement is to slowly withdraw it from your investments.  The 4% rule has been around for decades, which basically says that your money will last you for 30 years if you don’t withdraw more than 4% each year to spend.  This 4% rule has been challenged recently though because of tumultuous markets and increasing life expectancy.  What happens if you live longer than 30 years during retirement?  That is why it is often wise to purchase an annuity that guarantees lifetime income for your basic living expenses and then drawdown your remaining investments for extracurricular activities.  The final way listed to make your money last is to invest it in stocks.  This is the best chance to achieve significant gains in your savings, but also the riskiest way because there are no guarantees when it comes to stocks.  The article says that an easy way to determine the percentage of your money that you keep in stocks is to subtract your age from 100.  A 65 year old should keep roughly 35% of their money in stocks.  By combining annuities, investment drawdown and stocks, you might be able to meet all of your financial goals in retirement.

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