Ask the Actuary: Should I Buy an Annuity?

Last Updated Apr 25, 2011 6:09 PM EDT

Here's a recent question from a reader, after reading my prior post 5 Tips for Buying an Immediate Annuity: "I am very close to retirement and I have salesmen already contacting me about what I should do with my money. I am very interested in any more ideas you may have."

My first piece of advice is: "Go shopping, don't be sold." Do your own research and think carefully about the most appropriate method for you to generate lifetime retirement income, then go shopping for the best financial institutions and products that provide this income. Don't be sold something that a persuasive salesman is pitching you. He's often motivated to earn a large commission, rather than to make sure you get the best possible product.

Learn about the three ways to generate retirement income from your IRAs, 401(k) plan, and retirement savings: (1) living on just interest and dividends, (2) managed payouts, and (3) immediate annuities. A combination might be good for you. For example, you might take part of your portfolio, say 50 percent, and buy a low-cost immediate fixed annuity through a shopping service such as or Hueler's Income Solutions. Then take the rest of your portfolio and invest it in a portfolio balanced between stocks and bonds, and draw it down cautiously. If you withdraw four percent of your portfolio each year, you have a good chance of making that last for the rest of your life.

If you feel uneasy doing this on your own, get professional financial help from someone who is motivated to have your best interests at heart. My favorite way to pay for financial advice is by the hour or a flat rate for a specific project -- such as helping you set up your sources of retirement income. Two networks of national, fee-based financial advisors are Garrett Planning Network and the Alliance of Cambridge Advisors.

It's well worth spending many hours to learn and do your research. You're setting up your paycheck for the rest of your life, so you want to make sure you're doing it right.

Stay tuned for future installments of Ask the Actuary!
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    Steve Vernon helped large employers design and manage their retirement programs for more than 35 years as a consulting actuary. Now he's a research scholar for the Stanford Center on Longevity, where he helps collect, direct and disseminate research that will improve the financial security of seniors. He's also president of Rest-of-Life Communications, delivers retirement planning workshops and authored Money for Life: Turn Your IRA and 401(k) Into a Lifetime Retirement Paycheck and Recession-Proof Your Retirement Years.