If you run your numbers and think you might not have enough retirement income when you stop working, don’t lose your cool. This doesn’t have to mean you’ll be spending your golden years super-sizing fries, cokes and burgers at the Golden Arches. You still have a few options at your disposal. And one of those alternatives includes annuitizing your assets without buying a stink-ball annuity.
What Does Annuitizing Mean?
When you annuitize your assets it means you spend both the interest and (a little bit of) capital over many years. When you do that of course your nest egg dwindles over time but it’s not the end of the world – or at least it doesn’t have to be. You can this with a well thought-out plan so that your money lasts longer than you do.
I know that the idea still might leave you with a bad taste in your mouth. I admit that it’s not for everyone but it certainly might be for you. Let’s dive deeper.
What Are The Benefits?
There is only one benefit to annuitizing your assets and that is you get a heck of a lot more income. Let’s assume you have $100,000 to invest. Say you earn and withdraw 4% without annuitizing. That’s $4000 you snap up each year. OK. Not bad.
But let’s say you don’t care about leaving that $100,000 to your heirs. And let’s go on to say you still earn 4% on your $100,000 but annuitize the account over 30 years instead. I found a nice online calculator, plugged in those numbers and got the resulting table:
You can see that this option increases your income by a whopping 32% to $5560 a year. In other words, if you earn 4% on your $100,000, you can withdraw $5666 a year for 30 years before you go broke. That’s a spicy meatball Pilgrim! This is especially cool if you think you are only going to live another 20 years.
As I said, at the end of the 30 years your $100,000 is kaput if you annuitize – but if you are gone well before that it won’t matter. Again, the idea is to annuitize your money such that it lasts longer than you do.
What Are The Risks?
You probably already see the risks of this income option. First, you might outlive your money. If that happens, you’ll have trouble. Second, if you take a big chunk out of the capital for any reason along the way you have to either slash your withdrawals or you’ll run out of money much sooner. That’s why you have to really consider this option very carefully before you make this decision.
Why Not Use An Annuity?
If you want to, you can buy an immediate annuity from an insurance company. You hand over your cash to them and they’ll make payments to you for as long as you live (depending on the payout option you select). Never-the-less, I advise against it.
There are a number of reasons I feel this way. My biggest problem is that interest rates are very low and that means your payout will be small. Keep in mind that once you buy an immediate annuity you lock in the interest rate forever. There are other problems with immediate annuities as well. Low interest rates are only the tip of the iceberg.
But I’ll admit that there are some cases where an immediate annuity does work. Mainly, if you think you or your spouse are going to live a very long time beyond your life expectancy it could be something to consider. But generally speaking you’ll have a lot more control over your money and probably enjoy more income if you annuitize your assets without going through an insurance company.
Please keep in mind that you can use this income enhancement technique with any financial investment – including mutual funds. I actually love this idea for many people because it can create more income and principal over many years – the best of both worlds. Take a look at what happens to your payout if you annuitize an investment that earns 7%:
At this point, your income is hypothetically almost twice as much as it would be had you kept the money in a 4% investment without annuitizing. The only problem is the lack of certainty.
If you set up you equity investments to pay out (let’s say) 7 % every year, its great when the market goes up by 15% for example. You can take your withdrawals and still see your account values rise by the 8% that’s left over. But during down markets, this can be tough. It’s hard to have a positive attitude when you take withdrawals from an account that is dropping in value. Pass the Advil please. That’s why a 4% payout is usually a much smarter alternative.
How do you overcome this challenge? Understand that when you annuitize your assets it is a very long-term commitment. Sure there will be rough years. But if you give it enough time, invest appropriately and take a safe withdrawal each year, the chances are very much in your favor. The good years should more than make up for the bad.
While this is indeed challenging from an emotional point of view, it is absolutely a strong alternative to consider especially if you want to generate income from your investments for years to come.
Annuitizing assets isn’t for everyone but it might just be what the doctor ordered for you. If you don’t really care about leaving a huge war chest to your heirs, this approach can boost your retirement income big time and become a game changer in defining how you spend your retirement years.
Have you considered annuitizing your retirement assets? Why or why not?