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Common Retirement Questions: Should I Put Some of My Retirement Funds Into an Annuity?

The eighth most common retirement question: Should I put some of my retirement funds into an annuity?
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Retirement Daily’s Robert Powell sits down with Dana Anspach from Sensible Money to tackle the 10 most common questions in retirement.

In today’s episode, Anspach discusses the next most common retirement question: Is it smart to guarantee some of my retirement income by putting a portion of my funds into an income annuity?

An annuity is a vehicle that delivers guaranteed lifetime income and Anspach says that people should keep an open mind about buying an annuity. One thing people should think about when considering an annuity is how long they think they will live. Annuities are a way to cover the expenses that come with living longer. There is also the opportunity to be involved in mortality credit. This is where you pool your money with a lot of other people who may or may not live longer than you. “When you look at the internal rate of return on an annuity, you can map that out over time,” Anspach says. “The longer you live, the higher the internal rate of return that you would receive on a 'investment analysis'.”


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Anspach also discusses a strategy with annuities called laddering. “Let's say you wanted a guaranteed income stream of $12,000 a year. So you might put X amount in an annuity today that was going to pay you $3000 a year, and then a year or two later you would purchase the next $3000 and then a year later, the next $3000,” she says. “Averaging your way into income annuities can even-out the impact of the ups and downs in the interest rates.”

So how do you determine how much to put into an annuity? According to Anspach, there are two ways to calculate this amount. One is to look at your essential expenses and income and calculate what income you would need to cover everything. The other is to use a coverage ratio to see if 50% or more of your expenses will be covered by guaranteed income from pensions and Social Security. If not, then an adviser can help you see what changes could be made.

Anspach reminds people to be open minded to evaluate this tool objectively to see if it might be the right tool for you. 

Stay tuned for the next most common retirement question, where Anspach discusses if you should become more conservative with your investment portfolio as you near retirement.

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