NEW YORK (MainStreet) -- Annuities can be an effective tool to trigger a lifetime stream of income in retirement, yet buying the insurance product is a process complicated by conflicts of interest and “kickbacks.” That said, for retirees seeking to create a personal pension, it may be well worth the effort.
In a comprehensive study just released by Mark J. Warshawsky, the visiting scholar at the Mercatus Center of George Mason University compares the vaunted “4% rule” to a life annuity. Annuities are insurance contracts that issue periodic payments, often monthly, for life. Portfolio withdrawal strategies, such as the 4% rule, call for disciplined annual distributions, adjusted for inflation.
After calculating the income produced and the risks associated with both of the strategies, Warshawsky concludes that annuities deserve a “prominent role” in a retiree’s income plan.
“I judge the life annuity an effective instrument to produce lifetime retirement income -- generally somewhat better than the commonly used withdrawal rules,” Warshawsky writes. “I worry whether the 'lump-sum' culture of 401(k) plans and IRAs will lead retirees to a sufficiently structured and prudent approach to lifetime retirement income. It is clear from my historical simulations that commercial individual annuities should have a prominent role in retirement-income strategies for many workers.”
However, Warshawsky doesn’t recommend an “all-in” approach, favoring instead a combination of the two strategies.