September 2, 2010

USA: Locking In Income for a Lifetime

NEW YORK, NY / Wall Street Journal / Investing / September 2, 2010.

Locking In Income for a Lifetime

The Obama administration wants to nudge retirees toward annuities. Here's what you can buy now.

As more workers enter retirement relying on cash from a 401(k) plan or similar account instead of a company pension, fears are growing that some could mismanage their money and outlive their savings.

To reduce that risk, the Obama administration wants to prod workers into investing in lifetime-income products such as annuities, insurance contracts that function like pensions by paying a guaranteed monthly income in return for a big chunk of cash upfront.

This year, the Labor and Treasury departments asked for comments on steps the government could take to steer workers into annuities. One suggestion would require that part of an employee's 401(k) plan contributions be placed in an annuity that would automatically start providing income at retirement, unless the worker opts out.

Treasury and Labor plan to hold a hearing on the proposals beginning Sept. 14. Among the topics to be discussed, according to the hearing announcement, are the concerns expressed by some about the choice of annuities over other investments and strategies that also aim to provide lifetime income. Individuals who submitted comments during the public-comment period overwhelmingly rejected the idea of mandatory annuities, and few retirees choose to buy annuities when they cash out their defined-contribution plans.

Still, many financial pros say annuities and related products can help reduce the risk you'll outlive your savings. For people interested in securing an income stream for life, here's a look at some available offerings:

Immediate Annuities

With an immediate fixed annuity, you make a lump-sum payment to an insurer that promises to pay you a specified sum each month, or at other regular intervals, for as long as you live.

For example, a 66-year-old man who invests $50,000 in an immediate fixed annuity could get monthly income for life of about $324, according to annuity shopping site Adding a 64-year-old spouse to the contract, with payments continuing until the death of the second person, would cut the monthly check to $253.

One approach is to lock in enough annuity income to cover the gap between your Social Security check (and any pensions) and your minimum income needs. Very conservative investors may decide to annuitize a larger share of their savings, but financial advisers generally say investors shouldn't put all of their money into an annuity.

Consumers often worry that if they die young, they will have thrown their retirement savings away buying annuities. In the case of the couple above, adding a guarantee that payments will continue for at least 20 years—with the money going to beneficiaries if both spouses die—would bring the payment down to $247, according to

One drawback of most immediate annuities is that rising consumer prices over time will erode the purchasing power of the fixed monthly payment. Some insurers offer inflation-indexed annuities, but the trade-off is that the initial payment is considerably smaller than on a conventional immediate annuity.

The appeal of annuities depends in part on your health and your desire to leave a financial legacy, experts say. Those in poor health, or who want to leave the largest possible inheritance, might decide not to put a big amount into an annuity.

Investors should check the A.M. Best Co. rating of the insurer and choose one with a strong rating. Investors also should check the limits of their state's guarantee fund, which helps pay claims of insurers that become insolvent. While coverage limits vary by state, most guarantee an individual at least $100,000 in annuity benefits per insurer, which is why some investors diversify annuity purchases among insurers.

In the current environment of low interest rates, investors may want to spread annuity purchases over several years, says David Macchia, founder of Wealth2k Inc., which develops annuity "laddering" strategies. That way, you can lock in higher payments on annuities purchased in years when interest rates are higher, he says.

Longevity Insurance

If you decide against an immediate annuity and choose instead to take systematic withdrawals from your retirement savings, you may want to consider longevity insurance, another type of annuity offered by some insurers.

Longevity insurance is generally purchased before or at retirement and guarantees an income that begins paying at a set age, usually 75 and up.

Some advisers suggest pairing longevity insurance with another type of investment or withdrawal plan designed to last until the longevity checks start arriving. Longevity insurance also can be used to boost income in later retirement, when many people need more income for health care or assisted-living costs.

A 65-year old man who invests $50,000 in a longevity annuity offered by MetLife Inc. will get an estimated $1,000 a month if he begins taking income at 75, or $1,580 if he waits until 80. The younger you are when you buy the policy, the larger the payments will be, partly because of the increased time for investing. A 60-year-old investing the same amount would get about $1,300 monthly at age 75, or about $2,040 at 80, according to MetLife's figures.

As with immediate annuities, the monthly payment is reduced if you include a second person or add a guaranteed payment period. If the investor dies before his target age, some policies, including the one from MetLife, will return the original investment along with interest.

Managed-Payout Funds

Mutual-fund companies, seeking to hold on to customer assets that might otherwise flow to annuities, in recent years have rolled out mutual funds designed to provide monthly income to investors such as retirees.

But income from these so-called managed-payout funds isn't guaranteed. And with these funds debuting in a hostile stock-market environment, early investors have seen their monthly payments shrink.

One type of payout fund generates monthly payments with the goal of liquidating its assets by a target date—usually 10, 20, or 30 years later. A second type is based on the idea of a college endowment. It aims to produce regular payments, while preserving at least some of the original investment. Vanguard Group Inc., Fidelity Investments and Charles Schwab Corp. are among the firms that have launched managed-payout funds.

So far, the funds have highlighted the trade-off that comes with an investment linked to the market. The payouts on Vanguard's three managed-payout funds, for example, have fallen about 25% since their launch in May 2008. A Vanguard spokeswoman said the funds are intended to meet their objectives over long periods.

Ms. Kuykendall is a writer in Highland Park, Ill.

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