Introduction

Recall the primary goal of retirement investing: do not save so little that you outlive your savings. This is particularly important when the U.S. life expectancy continues to increase due to advances in medicine. Properly constructed, an annuity ensures that you will be able to afford a continuing care contract and any ancillary costs for the rest of your life. Think of an annuity as a financial safety net.

When you purchase an annuity, you trade off your mortality risk for a fixed dollar amount. The annuity issuer spreads longevity risk across a large population. If you pass away earlier than annuity tables predict, then you effectively forfeit the remainder (purchase price minus sums paid) to the issuer of the annuity. However, if you live longer than the annuity population’s average, you benefit from the annuity. Regardless, you have peace of mind and ensure that you will not be a burden to your children.

An annuity is a contract sold by an insurance company that provided either a lump sum or a stream of payments.

Usually, it is recommended that you increase your asset allocation towards bonds as you age. The reason for this is that it provides a steady source of income for expenses. However, if you have enough capital to meet your living expenses, then you should weight your asset allocation more towards stocks.1

If you are healthy when entering retirement, Malkiel and Ellis recommend investing half of fixed income investments in a “plain vanilla fixed annuity”. This advice doesn’t apply to people in poor health or with enough resources to leave an estate to next of kin.2

Fixed Annuities

Bernstein says if you need more than 4% of your nest egg, buy a fixed annuity.3

Summary

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Updated on January 1st, 2019