If you are considering a lump investing strategy when you retire, a life income annuity is surely on your list of options. I’ll bet every baby boomer without a pension and with money saved is considering annuities. There is so much to know and read about the costs, risks and benefits of annuities. Insurance companies are scrambling to introduce new annuity products with new and different features. Salesmen are being trained to explain them to confused retirees. Whom do you trust to know whether you should buy an annuity with a lump sum investment?
You should read the entire article (linked below) but first consider these statements by the authors:
[E]conomists have come to agreement from Germany to New Zealand, and from Israel to Canada, that annuitization of a substantial portion of retirement wealth is the best way to go. The list of economists who have discovered this includes some of the most prominent in the world, among whom are Nobel Prize winners.
Studies supporting this conclusion have been conducted at such heralded universities and business schools as MIT, The Wharton School, Berkeley, Chicago, Yale, Harvard, London Business School, Illinois, Hebrew University, and Carnegie Mellon, just to name a few. The value of annuities in retirement seems to be a rare area of consensus among economists.
A recent National Bureau of Economics study, which appeared in the prestigious American Economic Review, demonstrated under much more plausible conditions than had ever been supposed, that full annuitization was optimal for people who had no desire to leave a bequest to their heirs or charitable organizations. It also concluded that for those with bequest motives, substantial annuitization of retirement wealth was still the most prudent way to act.
Considering the recent unexplained gyrations in the markets, combining one or more annuities with our other plans for guaranteed retirement income is more interesting. In particular, an annuity laddering strategy may be the best path for maximizing the benefits of a life annuity while minimizing the risk.
Here is the link to the full article.
Note that the authors recommend using a “minimal level of acceptable retirement income” as a basis for making an initial annuity purpose, taking into account Social Security and other guaranteed income. This is something that I have advocated repeatedly.
Another key point from the research is that unless you’re willing to assume more investment risk, an individual cannot match the guaranteed income that an immediate annuity can provide. Forget the stock market. Research shows that it can work for you over the long term – maybe – but only if you take on more risk.
What do you think of the conclusions and recommendations from this article?