The Role of Immediate Annuities in Retirement Income Planning

The decision of whether or not to utilize investment capital to purchase immediate annuities versus making systematic withdrawals from an investment portfolio to maximize retirement income will, and should be, a frequent question arising in retirement income planning. Employer-sponsored retirement plans will often offer annuity payouts or a lump sum, which can be rolled over to an IRA where the owner will also have the opportunity to provide income from investment capital either as a systematic withdrawal of income from invested assets or by purchasing an immediate annuity for lifetime income. The same options are available when considering use of personally-held investment capital.

One of the reasons that a systematic withdrawal methodology is often considered the “automatic” choice is that the assumed rate of withdrawal is presumed to be as high as an annuity payout. For example, a straight life annuity will pay an age 65-year-old male gross cash flow in June  2011’s interest rate environment of about 7.5% per year, or about 5.5% if indexed to CPI. A portfolio of investments could be set up to withdraw any amount per year, but research has shown that based on historical market returns, annual withdrawal rates above about 4.5 to 5% can put clients in jeopardy of outliving their portfolios if the withdrawals keep pace with inflation.

In future postings, we will discuss in more detail the pros and cons of:

  • Systematic Withdrawals from an Investment Portfolio of Marketable Securities (versus Immediate Annuities)
  • Single-Premium Immediate Annuities (versus Systematic Withdrawals)
  • A Combination of Fixed Immediate Annuities and Systematic Withdrawals
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