The Do-It-Yourself Pension

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There comes a point in everyone's life when the great investing questions start to shift. You stop asking, "Is this stock likely to pop in the next three years?" and instead start to ask, "How am I going to buy groceries next month?"

If the answer is "selling stocks," stop and think for a minute. While there are some good strategies for selling off your portfolio in a managed way, they all fall down to some extent in one situation: bear markets.

Pushing off the bear
Cushioning strategies -- where you build up a "cushion" of bond and money market investments by selling stocks during periods of higher prices to carry you through more bearish times -- help a lot, but they take attention and discipline to implement successfully.

Better yet is a mix of income streams and proceeds from selling stock. But where's the income coming from? Social Security won't take a nosedive during bearish markets, but it's not enough for most. Dividends from stocks like Merck (NYSE: MRK), Goldman Sachs (NYSE: GS), or AT&T (NYSE: T) can be helpful, but they're not always reliable over the long haul. Today's blue chip could be tomorrow's (or next decade's) Ford (NYSE: F) and Lehman Brothers (NYSE: LEH). And companies sometimes cut their dividends -- often just when you need them most, as your other investments are hurting.

Pensions, on the other hand, can be great cornerstones of retirement income. They're often enough to live on all by themselves, and the income stream is predictable. But fewer and fewer retirees have this option -- and many of those who do elect to take lump-sum distributions and plow that money into the stock market. That can be a great strategy, but it still leaves us with the bear market problem. What to do?

Make your own pension
In this month's issue of the Fool's Rule Your Retirement newsletter -- available online at 4 p.m. ET today -- lead advisor Robert Brokamp revisits the immediate income annuity. Annuities are generally not our favorite products here at the Fool, but there are a few that can be very useful insurance policies for retirees worried about running out of money -- and excellent bear-proofing tools to boot.

In fact, while I've been plenty critical of annuities in the past, Robert's article has got me thinking of a good annuity as a do-it-yourself pension. Just as with a pension, having that one sure-thing income stream in your financial mix can bring tremendous peace of mind no matter Mr. Market's current mood.

Of course, just like a pension (or any other financial product), annuities have downsides. But unlike annuities of the past, fees aren't one of them -- if you know what to buy and how. Still, these are worth thinking about:

• Inflation. This old nemesis is back, and that means today's comfortable annuity income could be tomorrow's -- or next decade's -- canned-tuna-and-macaroni diet. Fortunately, there are now some annuities with built-in inflation protection. See Robert's article for more details on the costs and benefits. (Rule Your Retirement is a paid service, but a no-obligation 30-day trial is free -- click with confidence.)
• Opportunity cost. Sure, taking $200,000 out of your portfolio and putting it in an annuity will give you something like $14,000 of fallback income every year for the rest of your life. But what if you took that $200,000 and bought shares of Bank of America (NYSE: BAC) or Apple (Nasdaq: AAPL) instead? The first would pay almost $16,000 a year in dividends -- if the bank's dividend remains constant (a big, big if). The second probably won't pay a dividend any time soon, but five or 10 years from now, a $200,000 investment could be a whole lot larger. Of course, there's a fair bit of risk involved, and going back into the stock market brings Mr. Market's chronic bipolar disorder back into your life.
• When you die, so does the annuity. Your heirs would inherit that Bank of America stock, subject to whatever the estate tax ends up being, but unless you add some features to your annuity, they won't get anything after you die.

But while those drawbacks are worth taking seriously, for many folks they pale in significance next to the income annuity's huge upside:

• Guaranteed income for the rest of your life! That means you can plan around it, invest around it, make life decisions around it, and sleep soundly at night assured of it.

Shopping for an annuity can be bewildering, with the maze of products available. If you choose wrong, the fees and drawbacks can be awful. Robert's done a real service with this new article, drawing a clear map through the maze of products available and showing how recent research has pointed up the best ways to incorporate one of these annuities into your overall retirement financial picture. If income is a concern of yours, take the time to read it -- full access is on us for 30 days.