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Annuities Provide An Income Stream That Lasts a Lifetime.


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Risk Umbrella

The primary function for annuities in today’s marketplace is as a risk management tool.  If people want to guarantee a certain minimum income, then they can do that through annuities.  This allows them to invest the rest of their money more aggressively without fear of not having enough money to cover their minimum living expenses should the investment not do well.

Imagine on the day of your retirement, you sit down to plan your financial future.  You know what your annual expenses have been and you want to maintain your current standard of living.

So you consult a recent mortality table and find that if you’ve made it to your 65th birthday, you can expect to live to age 85 years old.

You perform a little calculation and find that, together with your Social Security monthly payment, you have just enough savings to maintain your current standard of living, and will have spent all of your savings and future expected earnings by the time you die at the age of 85.

But, what if you live longer?  The Tsunami Wave – is about to engulf you from all sides.  If you live to age 85, the mortality table finds that you can expect to live an additional 6.8 years or more.  Will you be reduced to eking out an existence on Social Security alone?  Where will the additional money come from?  What if future investment returns are not what you anticipated at the start of retirement?

These questions are increasing urgent in America today, as forces are combining to make planning for outliving your resources more important that it has been in the past.  Old rules of thumb for spending your assets in retirement, called de-cumulation, needs to be reconsidered.

If your objective is to ensure enough money to live on, no matter how long you live – think consumption instead of accumulation.  While we cannot present here all the scenarios that can be considered, we can give some general conclusions.

Imagine a retirement-savings well that never runs dry, no matter how long you live. Annuitization provides the only viable way to achieve this security without spending a lot more money.

We suggest putting enough of your portfolio into an immediate annuity and annuitizing enough of your assets so that you can provide for 100% of your minimum acceptable level of retirement income for the rest of your life, no matter how long you live.  Buy your own pension.

People tend to be drawn to annuities for safety, since users can protect themselves against losses and guarantee an income stream.  During a year like 2008, when the stock market sustains significant losses, people holding annuities tend to fare better.

If you had purchased a safety rider, (annuity) you may not have lost much of anything.  People who owned annuities in 2008 ended up in a much better position that those who were invested directly in the stock market.

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Wednesday, July 15th, 2009 Wealth Distribution

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