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If nestegg consists of $1.2M in 401k and IRAs can I fund a retirement of $85K per year by buying a large fixed annuity? My age is 60. I have no pension. I plan on getting Soc. Sec. at age 62. My wife is already collecting $756/mo from Soc. Sec. I ask this question because the answer given on the financialengines.com site says that at the beginning of next year I can retire with at least $94K income. Financialengines.com figures a conversion to a fixed annuity to calculate the retirement income.

That answer seems larger and simpler than the more conservative 4% or 5% of nest egg figure to estimate an annual retirement income.

It isn't obvious to me if investing in a fixed annuity involves a huge income tax when converting from a tax deferred investment to the annuity.
-Dannari
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That answer seems larger and simpler than the more conservative 4% or 5% of nest egg figure to estimate an annual retirement income.

Actually, it's not.

Obviously, an annuity simplifies your life if you don't want to worry about investments, and you don't care about leaving assets to your heirs. I assume you will set up your annuity so that your wife will continue to collect its full value after you die, or buy life insurance, instead, given her meager SS payment.

You still have two risks that must be considered, 1) the financial strength of the insurance company that is sponsoring the annuity. 2) The effect of inflation on the money and your lifestyle.

Remember that you have an average of 20 years to live, and your wife has more. You certainly hope the insurance company will be around then. Plus, your expenses will probably increase because of your aging, while inflation is decreasing purchasing power of your income.

You are right in considering the 4-5% conservative, when you are staring at $1.2M. But, I don't look at my retirement savings as an eventual windfall, but as a means to maintaining my lifestyle, or giving me the financial freedom to try something else.

Zev
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A point to remember is that the 4-5% withdrawal rate you read about in the Foolish world is based on living off investment income and leaving the bulk of your investments to your heirs.

The fixed annuity guarantees you (and or your wife) fixed income for life or for a fixed time frame. You do not have to worry about outliving your assets. The insurance company guarantees that. But in most cases, the annuity leaves no assets to your heirs. That is why it pays at a higher rate.

The annuity also usually offers no inflation protection. The payments are fixed for the life of the contract.

I do not know the details, but after age 59-1/2 I suspect you would not pay income taxes to convert an IRA or a 401K to a fixed annuity. Your plan administrator should be able to advise.
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I don't know how much of the $1.2M is in the 401k, nor the percentage of years in the plan prior to 1974, but it is conceivable that you MIGHT find a Lump Sum Distribution attractive. From your post the worst case if it's all 401K post 1974 is about an average 32% LSD tax rate,which doesn't look too appealing even if your annual annuity payments would push you into the 31% bracket. For details, if you or someone not so luckey are interested, see my post today on the Foolish 401K Forum. Ed
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<<The fixed annuity guarantees you (and or your wife) fixed income for life or for a fixed time frame. You do not have to worry about outliving your assets. >>

You do, however, have to worry about outliving the insurance company. If they go belly up, you are SOL.

Ray
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You can rollover the 401k into an IRA. There are lots of good mututal fund compnies to do so. The IRA can be set up to generate income if you need it. Ginny Maes yeald in the excess of 6% right now. That will give you your income you want. A better solution would put it into 50% fixed income and 50% stocks to protect you from inflation. Any additional income should be taken from your capital. The IRS will require you to start to do this in 10 years anyway. Your capital should last you many years.
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You can rollover the 401k into an IRA. There are lots of good mututal fund compnies to do so. The IRA can be set up to generate income if you need it. Ginny Maes yeald in the excess of 6% right now. That will give you your income you want. A better solution would put it into 50% fixed income and 50% stocks to protect you from inflation. Any additional income should be taken from your capital. The IRS will require you to start to do this in 10 years anyway. Your capital should last you many years.

Thanks for the reply, Scofield. I can avoid the immediate tax hit by rolling over the 401k into an IRA at a discount broker or mutual fund. I can then purchase an annuity for income. The only tax hit would be the income used each month. In addition, I'm going to look into a new annuity from T Rowe Price. It is a form of an immediate annuity which can grow with a market index. I think I may want something like a 10 or 15 year certain and continuous annuity. I will compare the numbers I get from T Rowe Price with say a balanced stock and income portfolio.
The reason I'm open to the idea of an annuity is that I am now going to be on the other side of the retirement planning curve. In the past the idea of a variable annuity was abhorrent. But now I'm not earning money to grow the nestegg. I'll be trying to maximize retirement income over our life expectancy. I don't even care about leaving an estate for heirs.
---Dannari
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