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Annuitizing your savings

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But the most common way to annuitize is with an immediate or payout annuity purchased from an insurance company. In exchange for a lump-sum payment, you receive monthly income.

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The most straightforward of these products provide a fixed monthly amount. However, you can also purchase a variable annuity and tie the amount of the benefit to the performance of fairly conservative investments such as intermediate bonds that could help you keep up with inflation. (Find out how much income your lump sum can generate at www.immediateannuities.com).

Shop around for the lowest fees and make sure you go with a well-established insurance company with solid financial backing before making a purchase.

Figuring the annuity amount
Once you've decided to go with some type of annuity, you need to figure out how much of your income it should represent. That depends largely on your resources. Those who receive a generous pension, combined with their Social Security income, won't need to do more. Ditto for the superrich.

"Bill Gates should not annuitize," Chen says.

Likewise, Setzfand doesn't recommend that people with limited resources tie up their money in an annuity. For those with assets under $100,000, an annuity isn't going to provide enough income to make the purchase worthwhile. Plus, they'll deplete all their money.

"They are going to have to look at other alternatives such as part-time work or delaying retirement and building up their retirement assets," she says.

For those in the middle, experts recommend that you convert about a quarter to a third of your assets into an annuity if you don't have a pension. Together with Social Security, about half of your income needs can be annuitized.

"This is going to do a lot to reduce the risk that you face," says Milevsky.

Of course there are downsides to annuitizing. The biggest is giving up control of your assets. There's always the possibility that you'll make the wrong bet. In other words, you won't live long enough to get the full benefit and in the meantime you've given up a chunk of your assets.

"This is a lousy investment if you die young and a great investment if you die old," says Reichenstein. "The longer you live, the greater the payout."

So think of annuities as insurance. For example, good drivers usually feel like they're getting ripped off with car insurance. Bad drivers, on the other hand, come out ahead because their accidents get covered. If longevity runs in your family, chances are pretty good that you'll be like one of those bad drivers getting the most from the insurance company.

On the other hand, don't go overboard and turn all of your money into an annuity. The unexpected still happens, even in retirement. "You still need an emergency fund," says Milevsky. "Who of us has lifetime income needs that follow the same schedule as annuity payments?"

Milevsky suggests purchasing an annuity between age 65 and 75. The longer you wait, the higher your monthly income will be.

But don't wait too long or you're increasing the chances of dying before recovering your lump sum.

"Heck, at 85, you shouldn't even be buying green bananas," says Spiegelman.

Bankrate.com's corrections policy -- Updated: Oct. 1, 2007
 
 
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