Steady Flow Of Income

Kiplinger's Personal Finance Magazine, Oct, 2001 by Mary Beth Franklin, Christine Pulfrey

Michael Lane, director of advisory services for TIAA-CREF, suggests that retirees calculate their fixed costs, subtract their social security benefits and any other sources of guaranteed income, and then purchase an annuity that will cover the shortfall. However, they should not commit more than half of their assets to an annuity. This strategy works best for retirees with assets of $2 million or less. People with more money than that generally don't need to insure a minimum income stream.

The check is in the mail

THAT PHILOSOPHY makes sense to Bruce Lewellyn, a lawyer from New Haven, Conn., who has spent his life advising clients about the rules and tax implications of employer-sponsored retirement plans. Now that, at 62, he has begun his own phased retirement and scaled back to part-time consulting work, Lewellyn plans to use some of his accumulated retirement savings to purchase an immediate joint annuity when he and his wife, Jean, turn 65.

"If I don't have x dollars in the mailbox every month, I'm going to feel naked," says Lewellyn, whose goal is to ensure that he and Jean will have about $60,000 a year from social security and an annuity to cover fixed costs such as groceries, utility bills and mortgage payments on their second home.

Knowing that basic costs will be covered, the couple will be able to invest the balance of their retirement money more aggressively. While Lewellyn concedes that the purchasing power of the annuity will dwindle over time, he thinks it is more important to hedge against longevity than inflation.

The cash to pay for an annuity should come out of the sale of bonds in your portfolio, meaning that your remaining holdings will be more heavily tilted toward stocks. That's also why this strategy relies on a fixed rather than a variable annuity. Variable annuities, which are tied to stock returns, reintroduce the uncertainty of the market.

If you use money from a qualified retirement plan such as a 401(k) or IRA to purchase an immediate annuity, your payments are fully taxable, meaning you'll have less money to spend. If you use nonqualified funds, such as proceeds from the sale of a home or money that's been growing in a taxable account, to buy an immediate annuity, only a portion of each payment is taxed, giving you the option of purchasing a smaller annuity.

It pays to shop around for the best value and a strong insurance company. Annuity Shopper (800-872-6684, or www.annuityshopper.com) offers a free shopping service and will gather customized rate quotes for up to a dozen immediate fixed annuities along with insurance-company ratings.

RELATED ARTICLE: Immediate fixed annuities The cost of a do-it-yourself pension

If you want to use a fixed annuity to create a guaranteed stream of income for your retirement, the table below drives home the importance of shopping around. It shows how much monthly lifetime income you can buy for every $100,000 you invest, and how various options will affect your payout. A 65-year-old man can buy an annuity that pays $787 a month for life if he chooses an AIG annuity that stops when he dies. But if he adds a guarantee that payments will continue for at least 20 years (to him or to his heirs), his monthly check drops to $662 per $100,000 invested. A joint-and-50%-survivor policy means that after one spouse dies, the payout is cut in half and continues throughout the life of the survivor. A 100% policy is not reduced upon the death of the first spouse.