Protecting Income in Retirement

What keeps you awake at night? For most adults, it’s the fear they will outlive their money. The transition from regular paychecks to full-blown retirement can be downright scary. With traditional pensions going the way of the Model T, and the Social Security platform growing rickety, most of us will need ways to generate a predictable, sustainable income that is guaranteed for life.

Enter the variable annuity. Because so much has been written about the negatives of variable annuities, we may get a lot of flack for writing this: Annuities can be very useful in the right circumstances. There, we’ve said it.

Once maligned because of high costs and withdrawal penalties, the newest versions of variable annuities offer riders that provide guaranteed income for life, just like pensions. That makes them very attractive to those seeking stability in a sea of stock market volatility. Even Fed Chief Ben Bernanke disclosed last year that two of his biggest assets are annuities.

Part of the reason that variable annuities have gotten a bad rap is because they have been indiscriminately foisted on the elderly by commission-hungry unscrupulous financial sharks. Because hefty surrender charges apply if you take the money out too soon, consider variable annuities only for long-term needs. If you cannot afford to keep a variable annuity for at least 10 years, it’s probably best to consider another investment.

Variable annuities are more costly than most mutual funds, but they offer value that mutual funds do not.  In addition to income guarantees, they have death benefits, creditor protection, and reduced transaction costs. The wide variety of available features vary from company to company, so be sure you read the prospectus carefully to determine the features of the annuity you are considering and the attendant costs.

In addition to long-standing arguments against variable annuities because of their cost, surrender charges, and a 10% IRS penalty on withdrawals made prior to age 59 ½, some critics protest that using IRA funds to buy variable annuities is redundant because they both contain tax-deferral benefits. But since there is no charge for the tax-deferred feature of a variable annuity, why not put one in an IRA? As a matter of fact, the “downside protection” features are a great reason to do just that. We pay for insurance on our cars, our homes and our health, so doesn’t it make sense to insure some of our retirement nest egg as well?

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