Exiting the Retirement Mess with Immediate Annuities

Hit by the long bear market in stocks, many recent retirees now have to wonder if their money will last. For retirees who are living the nightmare of the worst bear market since 1937-38, the questions are: What can I do to stop my savings from hemorrhaging? How can I invest more wisely? What other steps can I take in retirement so that I don't have to worry and scrimp — or end up relying on my children?

Stocks and Immediate, or Fixed, Annuities

You need stocks because your money needs to last for many years. The life expectancy for retirees continues to lengthen. Of a 65-year-old couple, one of them will probably live to be 91. The probability that you'll still be drawing on your nest egg 25 years after age 65 is the reason stocks — with their proven ability to stay ahead of inflation over the long term — are essential. In the later years of retirement — say, after age 75 — investors should reduce the allocation to stocks by about ten percentage points.

The Role of the Immediate (Fixed) Annuity

Fixed annuities are winning increased attention and applause from retirement specialists. Sold by insurance companies, annuities may be thought of as the reverse of life insurance. You pay a lump sum to an insurance company, which pays you a fixed monthly income for the rest of your life (or for the rest of yours and your spouse's). What's attractive about these annuities is their relatively high guaranteed rates of return. Planners generally suggest that you can spend only 4% to 5% of your retirement portfolio each year — more, and you'll risk running out of money. But today's annuities will provide a 70-year-old California couple, for instance, 7.6% of their initial investment each year — for as long as either of them lives. In other words, a $100,000 investment can translate to $7,600 a year in payments. A single 70-year-old man could get $9,340 a year; a woman (who is expected to live longer), $8,640 a year.

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An obvious annuity drawback is that its payments will not increase with inflation. Don't buy an annuity if you're in poor health, of course, because once you shell out the money, it's gone. Insurers will add a guarantee that your heirs receive benefits if you die early, but such guarantees cut monthly income.

You don't need to invest everything that you intend to put in annuities at one time. In fact, many advise buying in increments. With interest rates at 40-year lows, this may not be the time to put too much into annuities. If interest rates go up, buying a second annuity a few years down the road gives a double boost to your payments: one because of the higher rates, the second because you'll receive fewer, larger payments. To be on the safe side, buy from several insurance companies and check the financial strength of each one of them with a rating service. An annuity can be viewed as a substitute for a pension — one which you can buy for yourself