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Author: retof Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 294  
Subject: Annuities vs Investments? Date: 3/14/2007 9:59 PM
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Greetings! Fools!

I have a question regarding immediate annuities versus stocks and bonds for generating retirment income streams. Hoping someone knows more about annuities than I do.

In the March 2007 AARP Bulletin, beginning on page 22 there is an article titled "Fixed for Life". It's about immediate annuities as an income producing vehicle. It makes the point that a retired couple, each 65 could purchase an annuity for $100,000 and could recieve about $584 per month as income.

If you crank through the numbers that works out to just a little over $7000 per year for about a 7% return on your initial $100,000.

That seems like a pretty high rate of return for an annuity. Any ideas?

Secondly, several articles that I have recently read say that if you want to outlive your money in retirement and leave a little for the kids you should only withdraw about 4% from your retirment savings each year. So my question is how can the insurance companies do better than the 4%? What are they investing in that can pay 7% for life. What am I missing here?

Also any ideas on annuities? Are these a good deal for the retired fool?

Retof

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Author: jrr7 Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 199 of 294
Subject: Re: Annuities vs Investments? Date: 3/19/2007 11:06 AM
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This board is kind of deserted; I recommend that you ask on the following boards:

Retirement Investing
http://boards.fool.com/Messages.asp?bid=100154

Annuities
http://boards.fool.com/Messages.asp?bid=113191

Retired Fools
http://boards.fool.com/Messages.asp?bid=112955

That seems like a pretty high rate of return for an annuity. Any ideas?

Seems reasonable to me. Check it out yourself at the online calculator at www.brkdirect.com

Remember, when you buy an annuity, you get a payout for a certain number of years (your lifespan or a certain guarantee period, whichever is longer), but you give up your principal to the annuity company -- your heirs don't get the money. The company is betting that you won't outlive your life expectancy.

Secondly, several articles that I have recently read say that if you want to outlive your money in retirement and leave a little for the kids you should only withdraw about 4% from your retirment savings each year.

(1) that's talking about early retirement, at age 50 or so
(2) that assumes that you adjust your withdrawal upwards each year for inflation (it's not always 4% of your portfolio)
(3) a lot of 65-year-olds die shortly after they annuitize.

An annuity is really insurance; it is the opposite of "life insurance". You buy life insurance to guarantee a payout in the event of your death. You buy an annuity to guarantee that no matter how long you live, you'll keep getting paid.

FYI, annuities are typically not adjusted for inflation, and those that do increase their payment each year, typically don't guarantee to keep up with inflation.

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