How to Buy Insurance for Your Retirement

Here is an excellent way to make sure your money lasts for as long as you do.

Mar 22, 2014 at 11:46AM


Photo: 401(K) 2013

One of the most common fears among retirees and the soon-to-be-retired is they will outlive their retirement savings. This is a very legitimate concern as more people are living into their 90s and even 100s than ever before.

However, there may be some relief for these worries. A deferred-income annuity can be used as a sort of "insurance" in case you live longer than you expect.

The problem
Let's say you plan to retire at 65, and you plan to have a total of $2 million in total savings during retirement. Using the "4% withdrawal rule" that is common among retirement planners; this translates to an annual income of $80,000 with increases for inflation each year, that should last for 30 years or more.

The concern is: What happens if it doesn't last? What if there is a severe recession, or even a depression along the way? What if your money lasts for 30 years as planned, and you end up living to be 105 years old? While there is an excellent chance your money will last as long as you need by withdrawing 4% annually, it is still just that, a chance.

What is a deferred-income annuity?
A deferred-income annuity basically means you give a company a sum of money now, or when you reach a certain age, in order to establish a pre-defined income stream later. The sooner you buy, and the later you hope to collect, the higher the eventual income will be.

Using a current chart of deferred-income annuity payouts, if you buy a $100,000 annuity when you are 55 that will begin paying out at age 75, your annual income (for life) after reaching 75 might be around $26,000. If you buy a similar annuity 10 years earlier, at 45, the annual income jumps to $42,000.

How much and when?
There is no definite answer to this that works for everyone, but the obvious guideline is you never want to run out of money or be forced to make significant cutbacks in your lifestyle. Let's take a look at our earlier example of a retiree that is expecting $80,000 in income from his savings each year.

A good "insurance policy" could be an annuity that kicks in at 80 years old, bought for $100,000. Out of a $2 million retirement nest egg, this isn't that significant, and can provide tremendous peace of mind in the even if things go poorly with your portfolio. Such an annuity purchased at age 55 would produce around $45,000 in annual income for life after age 80. If the annuity income were further delayed until 85 (your money should last this long unless something extreme happens), the annual payout jumps to $87,000, which would more than replace every dime of expected income.

Of course, we hope our portfolios will provide us with plenty of income for as long as we may live. If things go according to plan, an annuity like this could also provide a nice income bonus during your later years, more than enough for a few extra cruises or some serious spoiling of the grandkids.

Looking decades ahead
I generally don't advocate annuities as sound investment choices. In fact, I usually discourage people from getting involved in annuities because it's not too hard to get better returns elsewhere, and when you die, so does your nest egg.

However, the deferred-income annuities are not a bad idea as a supplement to a sound retirement plan. The peace of mind you will be taken care of even if you live to 120 is easily worth the small portion of your savings it will cost. If your main goal is to create a worry-free retirement for you and your spouse, a deferred-income annuity is certainly worth looking into.

Where the rest of your retirement money should be
One of the dirty secrets that few finance professionals will openly admit is the fact that dividend stocks as a group handily outperform their non-dividend paying brethren. The reasons for this are too numerous to list here, but you can rest assured that it's true. However, knowing this is only half the battle. The other half is identifying which dividend stocks in particular are the best. With this in mind, our top analysts put together a free list of nine high-yielding stocks that should be in every income investor's portfolio. To learn the identity of these stocks instantly and for free, all you have to do is click here now.

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4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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