For the past 10 years, my pension check has been deposited directly into my checking account the first day of each month. It'll keep coming until both my wife, Georgina, and I have died.
On or about the second Wednesday -- the first time was
You may not think of pensions and
Georgina and I also have bought four lifetime income annuities from insurance companies. In return for a lump sum premium, each pays us a monthly income until we both die (in one case, the payment started lower but goes up 3 percent a year to counteract inflation).
All these payments, together with my
The peace of mind this knowledge brings -- together with the freedom to invest the rest of our money more aggressively if we want -- is to us the most important and often unheralded benefit of lifetime income annuities.
You may well achieve a greater rate of return by investing your money elsewhere, particularly with interest rates so low (annuity payouts are based on age, gender and prevailing rates when you buy). But an annuity may provide a bigger return if you live a long life and keep collecting for many years.
The point: An immediate annuity is not so much investment as insurance against outliving your money. Independent studies have found that including an immediate annuity in a retirement portfolio boosts income because the steady annuity payouts lessen the need to sell other investments for living expenses during a down market.
"What counts most is that if things really turn sour, one's annuity payments are always there," said
Income annuities, of course, are not the only way to generate income in retirement. I prefer a combination of approaches. Here are a few to consider (some may deserve a fuller discussion in a future column):
Variable annuities with guaranteed lifetime withdrawals
Unlike an immediate annuity, you retain access to your principal. There is a guaranteed amount you can withdraw each year. If the account runs out of money with these withdrawals, the insurance company keeps paying you with its own money. Offers potential for greater returns but in general minimum guaranteed payout rates are lower than with income annuities.
Living off the portfolio income, such as withdrawing interest or dividends only
That's virtually impossible with today's low rates unless you're a multi-millionaire and your needs are few.
Withdrawing enough for living expenses from your portfolio each year. Provides the greater control but you risk having to sell investments when prices are low and running out of money.
Splitting your portfolio into money you'll need relatively soon and money you can leave alone for a while. You spend down the conservatively-invested "short-term" money to give the long-term money time to grow to replenish the short-term bucket. The risk is less than with systematic withdrawals but you'll need substantial savings to implement the strategy.
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(c) 2010 Humberto Cruz