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Should I purchase an Annuity for my retirement?

Jan 28, 2012 by Edwin from Fresh Meadows, NY in  |  Flag
5 Answers  |  9 Followers
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7 votes

Obviously, the question begs to know more about your situation but I'll give you some general rules to follow. First, calculate what your fixed, required expenses will be in retirement, such as property taxes, utilities and food, etc. Then subtract any pension, social security or otherwise fixed income that you will be receiving. That will give you an idea of what your shortage is and what your savings will have to make up not withstanding your need for discretionary expenses such as vacations, dining out or holiday gifts. Those two areas will need to be supported by your savings. If that does not seem plausible, then I would recommend visiting with a financial advisor that specializes in retirement income planning. You can learn the questions to ask by downloading a Free Consumer Guide at http://www.familywealthadvisory.com/16questions/

2 Comments   |  Flag   |  Jan 29, 2012 from Marlton, NJ
Mike

I like this framework as a starting point for thinking about this question.

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Flag |  Jan 29, 2012 near San Diego, CA
Edwin

Thanks, will look into the consumer guide retirment planning

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Flag |  Jan 30, 2012 near Fresh Meadows, NY

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3 votes

I like the answers given and will add a little something. Because the recent Mega Millions lottery was on everybody's mind people are always asking would you take the yearly payout or the lump sum. My answer has always been the lump sum. I calculated the annual income I could spin off that lump sum at a 4-5.5% distribution and I could match the annual payout and still have millions to leave my family. The same principle applies here. I know everybody has a different risk tolerance but be careful signing away your life savings for the guarantee of a certain amount of income. Trust capitalism to do what it does (create wealth). Banks and insurance companies have gotten rich because of peoples fear over longevity risk. I am not saying there isn't a place for sharing that risk but don't go overboard. I like Evan's answer. The way I would do it is to put enough cash into lower risk investments that have higher distribution rates than money market and fixed annuities and use the rest to invest in low cost stock ETF's. Watch it closely; sell some equities when the time is right to replenish the fixed income side that is providing the income. Like one other advisor said, "Then rinse and repeat".

Comment   |  Flag   |  Apr 01, 2012 from Loveland, OH

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2 votes

As with many investment questions, the answer is "it depends"--- on your particular circumstances and on the type of annuity. I assume you are talking about a fixed annuity, so I will address your question accordingly. There is one principal reason to consider an annuity: to insulate yourself from longevity risk --- the risk that you will outlive your assets --- by receiving fixed, periodic payments for the duration of your lifetime. You also may purchase a "joint life" annuity to provide income to a spouse or other loved one in the event that you are the first to pass.

Traditional investments require you to estimate your time horizon, and to take the risk that if you outlive your life expectancy, you may run short of funds (depending on your total assets, your time horizon, and your spending rate). Now here is the bad news: most annuities have high fees and expenses --- much higher than virtually any other investment product. One reason they are so popular among insurance salespeople is the 4-8% up-front commission that are typical. These high fees and expenses tend to erode much of the benefit offered by these products. Ironically, the younger you are, the worse the economics for most of these products. Second, the typically high surrender charges mean that your investment liquidity is drastically reduced after you have purchased an annuity. Finally, with interest rates at historically low levels, it may not be an auspicious time to lock-in such low investment returns for a long duration, which is exactly the effect of buying an annuity. Whether an annuity makes sense for you depends upon your particular circumstances: your age, level of assets, sources of income and expenses, dependents, etc. Speak with an advisor (not an insurance sales person) to get their take on your situation.

3 Comments   |  Flag   |  Jan 29, 2012 from San Francisco, CA
Edwin

Thanks, however, I will be recievieing a penson for as long as is my time horizon. Would that pension act as a annuity?

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Flag |  Jan 30, 2012 near Fresh Meadows, NY
Edwin

Yes a fixed annuity. I was told not to think about a variable annuity. Thank you very much for bringing to light an area of investment that is normally not discuss, in the circle of people that i am assoicate my self with. I am 55 years of age, am I to young to ask this question. I believe I have an idea of my time horizon. I know I will be receiving a pension. To I have enough information to decide whether or not to purchase an annuity. Also, would a pension fund act as an annuity?

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Flag |  Jan 30, 2012 near Fresh Meadows, NY
James P. Dowd, CFA

Yes. A defined benefit pension plan is an annuity, and the fact that you are entitled to a pension (all else equal) reduces the need to purchase additional annuity-style investments in your portfolio, especially when you factor in social security, which also is an annuity. Your pension also works like a long duration bond in your portfolio, which generally suggests that you should be able to take a bit more equity risk with your "lump sum" balances, to protect the purchasing power of your investments. This is a rule of thumb, of course, so do not rush out and buy stocks on the basis of my statement! You should consider your overall needs and goals, and your overall assets and liabilities, income and expenses, in determining an appropriate asset allocation.

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Flag |  Jan 30, 2012 near San Francisco, CA

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2 votes

I agree with James. Your pensions and SS behave like annuities (lifetime of steady guaranteed income), so probably no need to buy (another) annuity with whatever's left. In our practice - to supplement pensions and SS - we use what I like to call "homemade annuities". We create a diversified portfolio of stocks and bonds using low cost index funds - then have a fixed amount transferred, electronically, to your checking account from the portfolio each Month. It feels and smells like an annuity because you receive the same amount on the same day each month - but the income is not contractually guaranteed and the portfolio fluctuates.However, we monitor everything very closely and can increase or decrease the amount coming out of the portfolio based on market conditions and other factors. I have used this approach with several retired clients and it has held up just fine - even through the 2008 crash. Best of luck and please contact with me with any questions. Evan

3 Comments   |  Flag   |  Mar 07, 2012 from Port Washington, NY
Edwin

Having said that. What would be the best approach of a 401k that will be at the time of retirement around 450k.

Flag |  Mar 07, 2012 near Fresh Meadows, NY
Evan M. Levine, ChFC

Hi Edwin, I can't answer that adequately because I dont have enough information. Our office is based in Port Washington, Long Island. Feel free to reach out to discuss this in greater detail. I can be reached at 516-240-6161 (Office) 917-696-0674 ( Cell phone) or evan@completeadvisors.com

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Flag |  Mar 08, 2012 near Port Washington, NY
Evan M. Levine, ChFC

You may find the following helpful in terms of evaluating annuities: http://www.completeadvisors.com/2012/09/27/whats-wrong-with-variable-annuities-2/

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Flag |  Sep 28, 2012 near Port Washington, NY

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2 votes
Herbert N Glass Level 18

Without more information about your financial situation and knowing your goals and objectives, it is premature to answer your question with a simple yes or no. However, annuities can be a great investment vehicle to create some guaranteed income for you and perhaps your spouse for as long as you live. The annuity can be setup to pay a monthly benefit that you (and if your spouse is included) can not outlive. It is the only investment vehicle that can create an income stream, paid on a monthly basis, that you can not outlive.

Comment   |  Flag   |  Sep 20, 2012 from Franklin, MI

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