Ten Steps for a Sound and Secure Retirement

7. Buy Annuities for Retirement Income.

- Annuities are the only investment that can give you income for life and help you avoid the risk of outliving your savings.

- Buy an annuity when you sell your house, with annual savings, and/or with part of your annual bonuses or savings

- Specifically buy multiple layers of different annuities that can generate different amounts of income for you in different phases of your retirement life (say 65-74, 75-84 and 85-for-life).

- There are four main kinds of annuities: 1) immediate; 2) deferred; 3) fixed; and 4) variable. These are defined in our Key Retirement Terms (link to this page)

- The tax and income advantages of annuities include:

1. Deferred taxes. You can use an annuity to defer taxes on your investment earnings until you actually receive the payout. Annuities give you the power of tax deferrals much like traditional 401(k)s or IRAs. You normally have to pay taxes on the income streams coming out of an annuity. But you do not have to pay taxes on the investment profits you make until those payouts take place. That's a considerable advantage.

2. No size limit. There is no limit on the amount of money you can put into an annuity. Unlike an IRA and 401(k), which do have size limitations, annuities do not have a ceiling or maximum pay-in amount. You can usually put any amount of money into annuity investments and defer taxes on the lot. But remember, if you buy an annuity with 401(k) or IRA money, you squelch this no-size-limit advantage. Inside an IRA or 401(k) there are always contribution limits.

3. Compounding Advantage. Because you can tax-shelter an unlimited amount of savings, annuities give you an important compounding advantage. Taxes are not going to dilute the compounding effect. Your investments will always grow to greater heights if you hold them in tax-sheltered accounts.

4. Income for Life. Annuities are the only financial instrument that can guarantee you income for life. This is a particularly powerful feature of these contracts. Annuities offset longevity risk.

Definition

An annuity is a financial contract whereby you agree to pay some amount of money to an insurance company in exchange for its giving you (or some other beneficiary) income streams for a specific period or for life. Annuities are a formidable way of generating retirement income and offsetting longevity risk.

Video

Harvard economist David Laibson explains when you should switch from life insurance to annuities.

Interview

Expert advice on using annuities to fund your retirement. Our interview with Ken Little. TOOLS/RESOURCES: Ken Little shares more about annuities and other investment strategies in his books, The Idiot's Guide to Investing and The Desk Reference Book. Annuities are also discussed in Cash-Rich Retirement by Jim Schlagheck. - You may also learn more about annuities by visiting these sites: AARP: www.aarp.org/bulletin/yourmoney/fixed_for_life.html www.iii.org/individuals/annuities/

MassMutual: www.massmutual.com/mmfg.products/insure/annuity/index.html

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