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Does an Income Annuity Make Sense for You?

by: Jonathan D. Pond, from: AARP, March 13, 2009

Key Decision Points

Possible reasons for choosing an income annuity:

You're entering retirement or are already retired.

You have retirement resources (pension distributions, retirement accounts, brokerage accounts) that you would like to convert into an income stream.

You're concerned about outliving your income.

You want a guaranteed source of income in retirement.

You have other retirement investments that can be invested for growth in order to offset the loss in purchasing power of a fixed annuity later in your retirement.

Shop ‘til you drop. If and when you’re ever in the market for an income annuity, shop for the best return—so long as you entrust your money to a financially strong insurance company. Don't assume that the first annuity you come across is the best. Chances are it isn't. Shopping for the best return is particularly important because, once you sign up, there's usually no turning back. You’re in it for life, so you'd hate to end up with an annuity that pays quite a bit less.

The upshot. Both methods, annuitizing or self-managing, have advantages and disadvantages, and no financial decision is "either/or." Many will benefit from taking an annuity for part of the money and investing the rest. If you decide to invest the money on your own, make sure you diversify your investments between stocks and interest-earning securities to avoid big losses when the stock market declines.

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