Have you spent years or possibly decades accumulating your retirement fund? Perhaps you diligently put part of your paycheck into a variable annuity, mutual funds, or stocks every month. Or maybe you built up your retirement fund by increasing the equity in your home and now you are ready to scale down and cash out. Regardless of how you got to where you are today, you have probably seen the value of your investments fluctuate widely over the years. But now it's time to think about how much risk you are willing to take with your future.
Annuitizing your retirement fund is the equivalent of getting out of the game and cashing in your chips. Generally this means looking for a steady income and in return giving up the chance of hitting the jackpot in the future. But should you accept the risk of losing an opportunity in exchange for a secure return? The best way to start to answer that question is to look at what is going on around you.
People are living longer. The most recent figures put out by the Centers for Disease Control state that a 65-year-old person is expected to live 17.9 years. Fifty years ago that number was 13.9 years. Thus the possibility of you outliving your savings is greater now than ever. And further medical advances will only improve your chances of living a long, active life. Annuitization means that your retirement fund will continue to pay you as long as you live. A fixed immediate annuity may provide a steady income that you cannot outlive. (Guarantee is based on the claims-paying ability of the annuity company. The purchase of an annuity may incur substantial fees and charges).
Additionally, income from annuitization may possibly be taxed more efficiently and thus may enlarge the retirement fund available to spend when compared to other ways of generating revenue. This is because part of the proceeds from an immediate annuity is considered a return of your initial investment. Therefore, it is tax-free. The "exclusion ratio" is determined by your age and the length of the payout schedule you select. (IRAs and other retirement plans might not qualify for the exclusion. Consult with your tax professional).
But you don't need to make an all-or-nothing decision about your retirement fund, whether to annuitize it or keep it more traditionally invested. For most retirees, the best solution is to allocate part of their retirement fund to a fixed source of lifetime income in a retirement annuity and allow the other portion to stay invested, say in a balanced portfolio of stocks and bonds. By having some of your retirement fund invested for a lifetime income, it permits you to invest more proactively with the remainder rather than in 2% bank accounts.