NEW YORK (Money) -- I'm 70 years old and have $150,000, or about a third of my retirement savings, in immediate annuities. I'm thinking of increasing my annuities stake to 50% of my assets. Is that advisable? -- D.B., Saint John, Indiana
I think you're approaching this issue the wrong way. Based on the way you phrased your question, you seem to think you're dealing with an asset allocation problem, as if annuities are an asset class that, like traditional assets such as stocks and bonds, should account for a certain percentage of your holdings to constitute a well-rounded portfolio.
But I don't think that's the right way to view immediate annuities.
The main reason to devote a portion of your savings to immediate annuities once you've retired isn't to diversify, although an annuity does help on that score.
Rather, it's to assure that, regardless of what the financial markets are doing and no matter how long you live, you can count on a check coming in month after month. (If you choose a joint-and-survivor option, your spouse will also get a check the rest of her life if she outlives you.)
So in determining how much, if any, of your money should go into annuities, you want to look at how much retirement income you'll need overall, and then decide how much of that income you want to come from assured sources vs. a diversified portfolio of stocks, bonds and cash.
Remember, Social Security will already be providing you with a monthly income that's not only guaranteed for life, but will also increase with inflation. (Granted, Social Security may very well end up being scaled back for future retirees, but I seriously doubt that will happen for people near or already in retirement.)
If you have a traditional check-a-month company pension, that's another source of guaranteed lifetime income. How much of your retirement income you prefer to get from assured sources as opposed to withdrawals from your retirement accounts is a subjective matter.
Two people with similar financial profiles could come up with very different answers for the simple reason that one may more highly value the security of a guaranteed check, while the other may feel more confident about managing his investments to generate income.
One reasonable way to approach this issue, though, is to put enough into annuities so that the total amount you receive from Social Security, pensions and any payments covers, if not all, then a good portion of your essential expenses.
This way, you'll have the comfort of knowing that, regardless of how long you live and how the markets perform, you'll be able to maintain at least a basic standard of living.
Keep in mind, though, that you also want to have enough savings outside of annuities in traditional investments for liquidity to meet emergencies, pay unexpected expenses and provide funds for discretionary expenditures (travel and what not).
You can also invest this portion of your retirement stash for long-term growth to better help you maintain your standard of living in the face of inflation. (For more on how such a strategy might work, click here).
So how do you apply all this to your situation? Start by detailing your retirement expenses. You can do that on a pencil and pad or you can use an online interactive worksheet like the one in Fidelity's Retirement Income Planner tool.
The goal, though, is get a good handle on what you face in both essential and discretionary expenses. Then take a look at the income side. Start with Social Security, any pensions, part-time work, etc.
You mention you already have $150,000 in an immediate annuity. I don't know when you purchased it, but if you did so fairly recently, you're probably getting payments of around $1,050 to $1,100 a month.
Add that to your other income. Now that you have an idea of how your income stacks up against expenses, the question is whether to devote more money to an annuity or just rely on withdrawals from your portfolio. If, as you say, $150,000 equals a third of your savings, then the total value of your nest egg including the money you originally put into the annuity is $450,000.
Which means you have $300,000 sitting in other assets. At today's payment rates for a 70-year-old man, every $25,000 you move into an immediate annuity will provide roughly $180 a month in lifetime income.
Knowing that, you can pretty easily gauge how much of your $300,000 you would have to devote to an annuity to get enough guaranteed income to give you the comfort level you seek.
Once you buy an immediate annuity, however, you no longer have access to those funds. You've given up that money in return for guaranteed income for life. So you want to be sure you still have enough assets to provide liquidity and some long-term growth.
A final note: If you decide you do want more guaranteed income, you don't have to buy it all at once. You can purchase annuities over time. And, in fact, I think going slowly is a good strategy for a couple of reasons.
You may find that a small extra dollop of income is all you need. If not, you can always get more later. And buying gradually has another benefit. Aside from your age, the main factor determining annuity payments is the level of interest rates.
By moving money into annuities gradually, you reduce the chance of putting in all your dough when rates are at a trough and payments are lowest.
So try to arrive at a balance that provides enough guaranteed income to give you the security you need while leaving enough savings in other assets so you have sufficient flexibility for dealing with the challenges and unknowns that will inevitably pop up throughout retirement.
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