The right way to get the retirement income you need
I have $400,000 in savings from which I need to draw monthly retirement income. Is it possible to do that with an immediate annuity?
Sure, not only is it possible to convert $400,000 -- or retirement savings of almost any amount -- to monthly income by buying an immediate annuity , that's exactly what an immediate annuity is designed to do: turn a lump sum of money into guaranteed payments that can support you throughout retirement.
And for many people, although certainly not all, an immediate annuity can be an excellent way to generate at least some of the retirement income they require. After all, one of the most valuable features of immediate annuities is that they can churn out monthly income that's guaranteed to last no matter how long you live (which, given today's
longer lifespans, might be well into your 90s).
Aside from the financial advantages of having income you can count on for the rest of your life, research also shows that retirees who receive income from a pension or annuity tend to be more satisfied with their life in retirement.
But immediate annuities also have downsides, the main one being that once you invest your money in such an annuity, you generally give up access to it. That means whatever portion of your savings you devote to an annuity will no longer be available to cover unexpected expenses that may pop up in retirement.
So you don't want to put all of your savings into an immediate annuity. You'll want to have other assets, like a diversified portfolio of stock and bond funds and a cash reserve, that can provide some long-term capital growth to help you maintain your living standard in the face of inflation and that you can tap for emergencies and such.
All of which is to say that the real issue you need to consider is whether an immediate annuity fits into an overall retirement income plan that makes sense for your situation.
Answering these three questions can help you decide whether that's the case and, if so, just how much of your four hundred grand you might want to devote to an annuity.
1. How much retirement income do you actually need? The first step toward gauging whether you're a candidate for an immediate annuity is to get a handle on how much annual income you'll require to cover your retirement expenses. And the best way to do that is to create a retirement budget.
This budget doesn't have to be accurate down to the last cent. Rather, if you estimate your expenses as best you can and then refine your figures as you get a better sense of your actual retirement spending, that should be fine. You want to come away with as realistic an idea as you can of what your outlays will be during retirement so you can gauge how much income you'll need to cover them.
You can create a retirement budget with pencil and paper if you like. But I think you'll find it easier (and more accurate) to use an online tool like BlackRock's Retirement Expense Worksheet. This free interactive worksheet allows you to enter upwards of 50 separate expenses. It includes a section for discretionary items (entertainment, dining out, hobbies, traveling, etc.), which gives you a sense of how much maneuvering room you have should you need to reduce expenses and makes it easy to identify specific expenses you can easily pare.
While you're doing your budget, I suggest you also take the time to do a little "lifestyle planning" -- that is, consider such issues as whether you'll stay in your current home, downsize or maybe even relocate to a less expensive area; whether you'll seek part-time work after you call it a career; and, whether you plan to spend most of your time pursuing activities close to home or do lots of traveling. The more you can factor the way you plan to live in retirement into your budget, the more accurate it will be.
2. How much income will you receive from Social Security and other assured sources? Before you commit to buying more guaranteed income via an annuity, you should check to see how much assured income you're already scheduled to receive.
For example, if you're among the minority of workers these days who qualifies for a traditional check-a-month pension, you can check with your HR department to see what size benefit you'll receive after retiring. (Some pension plans offer the choice of taking your pension benefit in monthly payments or as a lump sum (or even both), in which case you'll need to consider which option makes the most sense.)
For most people, though, Social Security will be their main, if not only, source of guaranteed retirement income. If you haven't already begun collecting benefits, you can see what size payments you're projected to receive based on your work history by going to the Social Security Administration's Retirement Estimator tool.
You can (and should) also use the tool to see how much your monthly Social Security payment may increase if you delay collecting for a few years. The amount you receive rises roughly 7% to 8% for each year you postpone taking benefits between the ages of 62 and 70. Unless you have good reason to believe you'll live less than your life expectancy, it's generally a good idea to hold off claiming Social Security, provided you have sufficient assets to fund your retirement while you delay.
The main idea, though, is to gauge how much guaranteed income you can count on without buying an annuity. By comparing that figure to the amount of income you'll need to cover your retirement expenses, you'll be in a much better position to decide whether it makes sense to devote a portion of your savings to an annuity to generate even more guaranteed income.
3. How much additional guaranteed income, if any, do you feel you need? If the monthly income you'll get from Social Security and any pensions is sufficient to pay all or nearly all of your essential retirement expenses, then from a purely financial standpoint you probably don't need additional guaranteed income from an annuity. You can probably draw as needed from your retirement nest egg to cover any expenses beyond what Social Security and any pensions will cover as well as any money you may need for emergencies and unplanned expenses.
That said, if you feel that additional assured income from an annuity will give you greater peace of mind or allow you to better enjoy your retirement, then, hey, go for it. Just be sure that you'll still have enough savings in stocks, bonds and cash to give yourself enough financial flexibility should your income needs change in retirement.
If, on the other hand, your basic living costs are greater than what you'll collect from Social Security and any pensions -- which will probably be the case for most people -- then you might want to at least consider bridging some or all of the gap by using a portion of your nest egg to buy income with an immediate annuity.
Today, for example, investing $100,000 in an immediate annuity will get a 65-year-old man about $560 a month in guaranteed income for life. That same $100,000 would buy about $530 a month in lifetime income for a 65-year-old woman and about $480 a month in monthly payments that would be paid as long as either member of a 65-year-old couple (man and woman) is still alive.
Of course, even if your expenses exceed the income you'll receive from Social Security and any pensions, that doesn't automatically mean you need an annuity. If the gap between your expenses and assured income is relatively small -- or if your nest egg is so large that you run very little risk of running through it during your lifetime -- then you may very well be able to rely on withdrawals from savings for any additional income you need.
To get an idea of how long your nest egg is likely to last given different levels of withdrawals, you can check out this retirement income calculator.
Finally, if you do decide you're a likely candidate for an annuity, I recommend that you.....
( Read More: http://money.cnn.com/2017/03/08/retirement/retirement-income-annuity/ )