Retirement: Three Big Questions

Question 1: How long will you live?

Your life span is the number-one wild card of retirement planning, says Laura Carstensen, Ph.D., director of Stanford University's Center on Longevity. "You could plan your money really well if you knew exactly when you were going to die," she says. "Unfortunately, it doesn't work that way. None of us has a guarantee."

You can, though, buy another kind of guarantee — an assurance that, however long you live, your money will not run out. It's sold by life insurance companies, and it's called an immediate annuity. Annuities have gotten a bad name, largely because of the abusive sales of "deferred" annuities, a kind of fee-heavy investment. But immediate annuities are a different animal. In simple terms, you give the insurance company a lump sum; in return, it promises to pay you a set stipend every month for the rest of your life, no matter how long you live. At current rates, for example, a $250,000 annuity would buy a 70-year-old man a yearly income of $20,400. If he dies shortly after that, the insurance company keeps the money. If he keeps on going, his monthly income keeps going, too.

There are drawbacks. Money that you tie up in an annuity will be money that can't go to your heirs. Unlike Social Security, few annuities increase their monthly payout to keep pace with inflation. And once you've paid the insurer, you can't get the money back to handle a medical emergency, say, or start a new business.

So don't annuitize your entire retirement stash. Many planners recommend putting between one-fourth and one-half of your money in annuities. Mike Piper, author of Can I Retire?, says to buy just enough annuity income to cover fixed monthly expenses such as mortgage and utilities. Either way, the payoff is peace of mind.

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