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Annuities cut retirement risk

By Jennie L. Phipps ·
Wednesday, November 3, 2010
Posted: 5 pm ET

Here's some more retirement planning grist to consider if you're dubious about the value of buying an immediate annuity to give yourself dependable retirement income.

The National Retirement Risk Index, created by the Center for Retirement Research at Boston College, looked at preretirement incomes and calculated how much retirement income each household would need to maintain the same standard of living. Then it took those numbers and figured out the percentage of households at risk of not having within 10 percent of that much money.

The results will make you cringe. In 2009, 51 percent of all households will reach age 65 without having enough potential income to maintain their standards of living. Early boomers are in the best shape at 41 percent, with late boomers at 48 percent and Gen Xers at 56 percent.

The study assumed that households would have Social Security and some would have old fashioned pensions. It also assumed that many would have retirement savings that would be used to purchase inflation-adjusted annuities. In addition, the study examined two other income strategies. The first scenario was that households would draw down their savings at a rate of 4 percent per year, a strategy recommended by many financial planners. The second alternative scenario examined what would happen if households lived off the interest on their accumulated savings at the then-current average return of 1.9 percent (slightly higher than the current one-year CD rate).

The results showed, not surprisingly, that living off savings earning the low interest rate of 1.9 percent increased the percentage of people at risk of running short of money from 51 percent to 60 percent. Those people who drew down their assets at 4 percent were at 53 percent risk for not having enough money.

High-net worth households were most affected by not annuitizing their assets. The percent "at risk" increased from 42 percent to 47 percent for those who drew down their assets at 4 percent a year and increased from 42 percent to 57 percent for those who lived off the interest of their money invested at 1.9 percent annually.

The study notes that one of the reasons that this is true is that more high-net worth households live off their savings, while lower-income households are likely to be more dependent on Social Security.

There are lots of holes in the logic of this study. We could have a field day picking it apart. But even after we got done, these statistics would still argue for putting at least some retirement savings in an annuity as a hedge against an all-kibble diet.

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November 08, 2010 at 9:21 am


There are plenty of annuities that provide much better than 4-5% , many of which offer bonuses. One I am thinking is 6% with a 7% up-front bonus. How many bonds are paying those rates you are talking about???? Plus, considering their track record, I personally feel that the debt of the insurance company (federal) is safer than the municipalities (local taxable authority) for MY retirement.

End the Ponzi Scheme
November 04, 2010 at 9:31 am

One more time, slowly so everyone can get it this time.

Any survey can be skewed to present whatever fact you want simply by selecting the matching data to back it up. 1.9% return is laughable, you get that without even trying. BTW they're call Certificates of Depression because that's what they are, you're depressed for buying such a low return.

Now back to why not to buy investments from insurance companies.

If I want to take out 4% per year, or live off the interest, I need something better than the 1.9% clearly. So, where to turn. Looking over tax-free municipal bond funds, I find the number of funds with a 1 year return exceeding 5% is 190. Now there's not much spread in there, because the highest return is only going to be 6-7% for long term funds (something with a track record). How does that annuity look now? A real 6-7%, remember it's tax free, versus the 4.5% reported a couple of days ago when the annuity line was rolled out again in this column. One you keep the principal, the other it's gone day 1.

Easy decision.