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If you are one of the rare few who have a guaranteed pension at work, you’re probably pretty happy when you think about your retirement. Over the last 20 years or so, these have just about evaporated for most of us working stiffs, except for teachers and public employees. Now, any state or local employee probably is just a teensy bit worried these days about underfunded pensions, but let’s not go there for now. But what about the rest of us?
We’ve all heard about the profligate baby boomers and their frugal saver parents, but the truth is that those “frugal” parents probably collected a nice stable pension from the giant stable companies they’d worked for for 30 years. Baby boomers have been hit with the triple whammies of companies who have moved to 401ks, far less certain and stable employment, and a big thud from investments just as they reach retirement age. And while I’m at it, let’s talk about those generous company matches to your 401k—even a “great” employer probably has figured out by now that a 5% match costs a lot less in contributions than a pension plan (especially if one or two employees don’t contribute, ya’ know?) and is a lot cheaper to set up and run.
So basically, it’s all on you and Social Security. And now, we get to annuities. People hate them, in fact, I hate them. Why? Because the insurance industry has come up with a jillion ways to separate you from your money, pay you less than you thought you’d get, and make it darn near impossible to get out of them once you plunk your money down. Like all the other creative insurance “products”, it’s buyer beware and be sure you know what you’re investing in.
The other reason many people hate annuities (I’m talking about the simplest single premium fixed annuity here) is that it HURTS to write out a big check and wave all that money bye-bye. And we all want to leave our kids a million bucks, right? Do me a favor–ask your kids whether they’d prefer you to run out of money and move in with them, or whether they’d prefer you take care of yourself.
But here’s why I think they’re worth considering:
- You can get more income out of the same amount of money. A rule-of-thumb safe withdrawal rate from your retirement portfolio is 4%. So let’s say you have $250,000. You can probably safely withdraw $10,000 per year/$833 per month. Now let’s say you purchase an annuity for $250,000. Even at today’s really crappy rates, you will probably get a payment of around $13,125 per year/$1,093 per month. Makes a difference.
- You won’t ever run out. One big risk many of us face thanks to the improvements in medicine is living long enough to outlive our money. The market hasn’t been helping much, either. You can win the lotto, sort of, if you beat the odds and live past 85—a properly structured annuity will keep on paying
- They can provide you more money when you’d really like to spend it. That is, when you’re still young enough retired to travel, etc. If you can cover your expenses with a combo of Social Security and an annuity, the rest of your portfolio can be allowed to grow longer. Beats working until 85.
So, if you’re anywhere near retirement age, ask yourself if you’d feel better if you had a guaranteed source of income, like a pension or say, double the amount of Social Security you’ll actually get. If so, it’s worth looking into an annuity. Even if you’re not too thrilled with the current rates, it’s worth considering for the future. If rates improve, you can jump on it then; if they don’t, an annuity is still likely to be the best available.
Of course, selecting one requires some serious thought (hint: get some objective planning advice before you pay a commission to that nice man) and comparison shopping. But for a lot of people, it could make the difference between just barely making it, and having some serious breathing room.
