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How to Make Your Retirement Money Last

A living-benefit variable annuity provides guaranteed income — and potential annual increases

By Erin Botsford

There’s a lot of financial advice on how to invest for retirement. But what should you do with the money you’ve accumulated in your 401(k) or IRA dollars once you retire?

That’s a key question, one I deal with frequently as a financial planner. After all, you’ll want the cash to last the rest of your life.

The Top Goal for Your Retirement Portfolio

Your No. 1 objective should be to secure enough predictable income to sustain your basic needs and satisfy your lifestyle.

Once you’ve figured out how much that would be, your next step is deploying your investments in appropriate income-producing assets to help ensure you won’t run out of money and find yourself in a precarious position. 

Rethinking a Popular Strategy

Some financial professionals might recommend using a bond mutual fund or a ladder of individual bonds that will come due at various points of time in the future.
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In the past, I would have recommended that strategy for all or a portion of a retiree’s income.

But because interest rates are so low these days, I believe this strategy isn’t appropriate right now.

Buying an Annuity with Your Retirement Funds

Another option: an annuity, a financial product sold by an insurer that would give you a lifetime of income in exchange for some or all of your retirement funds. Annuitizing, as it's called, is something that many people consider as they near retirement.

I like certain types of annuities, but not others.

3 Concerns About Annuities

At first glance, buying an annuity might sound appealing because it can provide peace of mind. But I think there are three potential problems with this strategy.

First, the amount of money you receive each month will be calculated based on the current interest-rate environment and the insurer’s returns on its fixed-income investments. Since interest rates are so low now, your income will be lower than it might be in a higher interest-rate environment. 

Second, depending upon the insurer and the contract you sign, you probably will never see your annuity’s income figure rise because your returns are locked in. So when interest rates go up, as they will, you wouldn’t profit from that.

Third, and this is usually the game changer for many married people, there is no death benefit for your heirs. If you and your spouse happen to die together in an accident in the future, your heirs would likely receive nothing from the annuity.

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One Type of Annuity Worth a Look


What’s the alternative?

I’m a fan of investing in a variable annuity with a living benefit. Here’s how it works:

With a living-benefit annuity, you give the insurer a lump sum of your retirement dollars (generally $50,000 or more), select one or a number of its stock and bond subaccounts, which are similar to mutual funds, and decide when to start receiving your payments. Although the subaccounts will go up or down based on the markets, the annuity also has a guaranteed-income feature.

Most living-benefit variable annuities guarantee a 4 or 5 percent annual increase in the amount of your original investment, regardless of how the markets do. So you can rely on a guaranteed minimum income, with the knowledge that there will be a boost in income if the account value rises.

Investment Flexibility

The best part about this strategy is that you get to manage your subaccounts over the years, giving you the potential to increase your principal value and monthly income based on the investing climate. If markets slump, you will still receive the income rate initially promised.

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Advantage of Delaying Annuitizing

Should the markets turn against you and the value of your subaccounts falls to zero, you can then annuitize the contract. Let’s say that happens when you’re 85. Instead of having annuitized when you bought the product at, say, 65, the income calculated for an 85-year-old will be substantially higher than it would have been when you initially retired.

The downside of this strategy is that once you annuitize the contract, your heirs won’t receive a death benefit. Then again, if you’d run out of money in any other scenario, your heirs wouldn’t have an inheritance either.

A Complicated Purchase

There are, of course, fees involved with these annuities and each insurer’s product is different. Living-benefit annuities can be complicated. Discuss the move with a financial adviser before you buy.

Erin Botsford is the author of The Big Retirement Risk: Running Out of Money Before You Run Out of Time. She is also is founder and chief executive of The Botsford Group, a boutique financial planning firm with offices in Frisco, Texas, and Atlanta. Read More
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