EVEN THE BEST PREPARED SENIORS enter retirement facing a dilemma: Is it possible to live on savings and investments, and have enough left over to pass on to the next generation?
That's the question Barbara B. Pendleton confronted four years ago, when she retired at age 57 from her career as a public health microbiologist at Tulare Labs in Tulare, California. Pendleton opted for early retirement to relocate with her terminally ill husband, James, from the West Coast to suburban Atlanta. Shortly after the move, James died in hospice care. Pendleton then began working with a financial adviser, in part, to make certain she could live her retirement dreams while still saving enough to pass on to her grandchildren. Her adviser's answer: annuities, insurance products that, for a lump sum, offer a guaranteed stream of payments during retirement.
One of the annuities Pendleton holds with MetLife pays out $600 each month for the rest of her life. According to her contract, if she dies prematurely, those payments will go to her heirs for 20 years after the contract's initiation. For now, the annuity payments are a nice supplement to Pendleton's Social Security and pension income. All the while, the nest egg she saved while working remains invested and untouched. "I was looking for security," says Pendleton. "I'm using the annuity to get fluid income for everyday living. It allows me to live comfortably."
There are two types of annuities--fixed and variable. With a fixed annuity, the insurance company promises under contract that you will earn a minimum amount of interest (at a "fixed" rate) on your lump-sum payment or series of payments. Pendleton, for example, gave her insurer, MetLife, $100,000 in exchange for her $600 per month checks. Insurance firms typically guarantee these periodic payments for a defined length of time such as 20 years, your entire life, or the lifetime of you and your spouse. Pendleton's fixed annuity will pay for the rest of her life---and to her family members.
A variable annuity is a bit more complicated. With these vehicles you can invest in a basket of mutual funds or other investments. The rate of return on your initial payment depends on the performance of your holdings. The variable annuity also lets you receive periodic payments. The value of the annuity while it's invested and growing is not subject to income tax. Investors pay fees and expenses, of course, imposed by the underlying mutual...