No Pension? Why an Annuity Might Be Right for You

 In my last post, I discussed the concern I have for someone who trades his or her interest in a pension for, most commonly, the house. Despite the fact that I almost always suggest to my clients that this is something that should be carefully considered since the house not only requires care and maintenance but may not provide them with the income they will need when they are ready to retire, many of my clients elect to make this trade anyway.

So, what do they do when the time comes and they wish to retire? How do they convert the house back into an asset that can provide them with a “life-time income stream?”

One way to address this problem might be to sell the house and invest some of the proceeds in an annuity. This would happen at the point in the future when there is no longer the need to retain the house and it could be sold and converted into cash.

But what exactly is an annuity?

Annuities are sold by insurance companies. You put up a sum of money, say a portion of the proceeds from the sale of your house, and your insurer pays you a certain percentage of that amount for life. These “pension substitutes” come in three main varieties.

• A fixed annuity, which provides you with a fixed number of dollars per month
• A variable annuity, which pays you a fixed percentage of a stock and bond portfolio’s value
• An inflation-linked annuity, which adjusts your payments for inflation every year

While you would generally receive the largest initial payout from the fixed annuity, it may not be best for you over time since the payment will not increase as the cost of living goes up. And if you live a long time after retiring, the cost of living may rise significantly over your lifetime.

A variable annuity may provide a greater income stream when the market is doing well, but may not provide you with sufficient income to live on when the market is down.

Finally, an inflation-linked annuity may provide a lower monthly amount at the beginning of the payout, but will at least allow you to keep pace with inflation.

So, is an annuity right for you? My recommendation is that you contact your own investment advisor and discuss your retirement needs. But if you have waived your interest in a pension in order to keep your house, and a lifetime income stream is now important to you, an annuity might be something to consider.

This post is intended for the private use of the friends and clients of Attorney and Mediator Daniel R. Burns and is not intended to be legal or financial advice. You should seek advice from a financial advisor before investing in anything, including an annuity.