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Far more peoplefrugality have over-spending problems – than have under-spending problems – so you may be tempted to dismiss this article as completely irrelevant.  But there’s a good chance that even if you’re an over-spender now – you’ll find yourself an under-spender in retirement.  In fact – nearly all retirees are under-spenders.

Consider this.  You’ve just retired with what – yesterday – seemed like a very comfortable nest egg.  But today, the looming question is – how much income can I take annually and still be certain that my money will last as long as I do?

It’s an unanswerable question – unless of course you know exactly how long you’ll live.  So most of us – fearing financial boogey-men – like inflation, medical costs, long-term care expenses, higher taxes, and unstable Social Security – will become chronic under-spenders. 

What’s the answer? 

The good old-fashioned, boring…annuity.  While they come in a dizzying array of shapes and sizes, they all share one unique feature – guaranteed lifetime income – no matter how long we live.

Most mainstream investment advisors suggest we can take 4% of our nest egg each year with little fear of running out.  So a $1,000,000 nest egg will support about $40,000/year of income.  But…

·        If you were to earn 4% on your money each year in retirement – you’d die with $1,000,000 still in the bank.  That’s a million dollars of lifestyle you will have left behind.

·        On the other hand, if your money earns nothing – it will last for only 25 years.  Retire at 65 you’re out of money at 90 – zip, zero, nada!

A typical $1,000,000 annuity will generate about $60,000 of annual income for a 65-year-old – about 50% more than a non-annuity alternative.  But the real benefit is that your annuity will still be paying that same income at age 90 – age 100 – and beyond.  Statistically – 10.1% of today’s 65 year-olds will live to 100.

But before you plunk the whole enchilada into an annuity – beware of their downside – the loss of liquidity.  Need to get at $100,000 in an emergency; you’ll likely pay surrender charges to get at the cash.

A good advisor will allocate a portion of the million – say $850,000 into an annuity – producing about $51,000 of income .  That’s more than the broker’s 4% ($40,000) alternative – and keeps $150,000 in rainy-day liquid cash.

The operative word is “good” advisor.  Wonder where you can find one of them?