Weighing benefits and risks
If you can manage payments that change, consider an immediate variable annuity, says annuities expert Moshe Milevsky of York University in Toronto. You choose the percentage of the total portfolio that you'll want paid out, in monthly amounts. Starting with a lower percentage sets you up for higher payments in the future, as long-term stock values grow. "The potential upside seems to compensate for the downside risk," he says.
Milwaukee financial planner Paula Hogan encourages clients to consider inflation-protected annuities, to preserve their lifetime purchasing power. But don't annuitize all your money, she warns. You need ready cash for unexpected expenses, such as health costs. If you're living on Social Security plus modest savings, annuities may not be for you. They're best suited to people who use them as the safe part of their investment mix, with the rest of their money invested for long-term growth.
Financial planner Michael Kitces of Columbia, Md., has a smart idea for people who'd rather keep their cash and take systematic 4 percent withdrawals adjusted for inflation. Split your savings evenly between stock funds and bond funds, and take the withdrawals mostly from bonds for the first 10 years. The value of your equities should more than beat your gains from inflation-adjusted annuities, his research shows. Of course, there's no guarantee. If you live well into your 90s, Kitces says, the annuities will win.
Jane Bryant Quinn is a personal finance expert and the author of Making the Most of Your Money NOW.