The risks of longevity convinced this early retiree that
guaranteed income has a place in his portfolio.
The ultimate in retirement security is guaranteed, lifetime,
inflation-adjusted income. Most of us will get some of that—though not enough—
in the form of Social Security. A few will get the balance of what they need
from pensions. But the rest of us will see a shortfall between our fixed living
expenses and our guaranteed income.
You can try to fill that gap by making systematic
withdrawals from your investment portfolio throughout your retirement. A
balanced portfolio is likely to outperform many other retirement income
options, if the
markets do average or well. But it’s not guaranteed. Even for experienced
investors, there are serious risks in managing a retirement portfolio.
The insurance industry offers what sounds like a safer idea:
an annuity. Annuities can
provide peace of mind by removing longevity risk—the chance you’ll outlive your
assets. And, they let you generate more safe income than you could from the
same amount in a portfolio of stocks and bonds. That’s because, with an
annuity, you’re consuming both principal and earnings, plus you’re pooling your
lifetime risk with other buyers.
Unfortunately, many kinds of annuities, especially complex variable and indexed annuities are a quagmire of pushy
salespeople, hidden expenses, and dizzying complexity. Consequently, many
careful retirees rule out any kind of annuity as a retirement income solution.
I was once in that camp. Why would I need an annuity, when I had proven success
growing my own diversified portfolio in excess of our retirement
pension plan income needs?
But then the market crashed in 2009. Our portfolio did
better than most, and we had no need for income at the time, but the huge drop
demonstrated the potential downside of retiring at the wrong time. I knew that
retirees who had purchased annuities were happy with the steady paychecks they
received during the crisis. I realized that annuities had a place in retirement
planning, at least for those without the investing skills and fortitude to
endure a severe recession.
Once I retired, the decades ahead without a regular paycheck
suddenly became very real. It didn’t matter that I had many years of investing
under my belt, and was confident in my ability to manage our portfolio. It
didn’t matter that we lived frugally, and could cut our living expenses even
further if needed. Because there was one thing I realized I couldn’t control: how long I would live. Insurers,
however, could control
that variable and protect me from running out of money, by combining my
lifetime with thousands of others via an annuity.
Finally, when I reviewed my estate plan, I realized that,
even though I had accumulated enough money to provide for my family, I would
not necessarily be around to manage those assets for the duration. I could see
that my loved ones might need to put a portion of our assets on “autopilot,” so
they could count on a steady lifetime income without worries.
Then along came research demonstrating that combining
single-premium immediate annuities (SPIAs) with stocks may be the best way
to generate retirement income for a wide set of circumstances.
Given all those factors, I’ve come to believe that you
should plan for a guaranteed income “floor” in retirement. This assures a
reliable income stream that meets your essential living expenses until the end
of your life, however long that may be.
Annuities will be a key part of that equation for many.
We’re talking here about simple single-premium immediate annuities, not
their complex and expensive cousins—variable and indexed annuities. With a
SPIA, you hand the insurance company a lump sum and they immediately begin
paying you a monthly amount. There’s no unexpected variability, no complex
indexing formulas, and no extra fees.
When should you buy an annuity, and how much annuity
should you buy? These are complex questions that require personal financial
planning. For example, we are in our mid-50, our lifestyle is flexible, we can
manage our own investments, and we don’t need extra income right now. So it’s
too early for us to put our retirement finances on “autopilot.” We will
probably wait until our mid-60, when we may put about half our current
portfolio into annuities.
[Source: http://time.com/money/3955901/retirement-income-right-annuity/]
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