Nearing Retirement? Why It Pays to Consider Annuities

Many investors approaching retirement don’t think they need annuities, but the lifetime income they offer can add security to portfolios that consist primarily of stock and bond funds. This is particularly important when markets are volatile.

An annuity is essentially a contract with a life insurance company. You pay the life insurance company, either in a series of payments or a lump sum, and it, in turn, guarantees you a stream of income for a specified period, often life.

Annuities have long been considered important retirement planning tools, but today, in wake of the downturn of 2008 and 2009, they’re getting even more attention. That’s because so many investors were forced to delay retirement.

Any market downturn that hits just before retirement, or during retirement, can leave even conservative investors with a much smaller nest egg and little time to recoup the losses.

According to the Financial Research Corporation, a 65-year-old retiree with a $1 million portfolio of stocks and bonds who withdraws an inflation-adjusted $45,000 a year has a 25% chance of running out of money before age 92. On the other hand, if the same retiree invests $600,000 in stocks and bonds and $400,000 in an immediate annuity, and withdraws the same inflation-adjusted $45,000 a year, he or she only has a 6% chance of running out of money before age 92.

In other words, if you invest a portion of your retirement funds in an annuity, you’ll have a dependable income stream for life – and that’s important in a retirement portfolio.