Annuities can be a smart way to create a steady income stream in retirement, but they aren't right for everyone. In this Fool Live video clip, recorded on June 16, certified financial planner Robert Brokamp discusses the pros and cons of buying annuities for retirement income.
Robert Brokamp: Then Rachel says, "Can you explain the benefits of an annuity? I just have monthly Social Security and use my retirement accounts to supplement, and that is substantial balance. But I thought a monthly annuity payment might be helpful. I only own individual stocks in my portfolio and no pensions." I recently wrote about annuities in both retirement and total income. The only annuity that I like is just a plain vanilla annuity. You hand over, let's say $100,000 to an insurance company and they send you around $6,000 a year for the rest of your life, it's like creating your own pension. The amount that they give you really depend on your age. The older you are, the more payout you get. The younger you are, if you buy an income annuity and started it at 60, it might be closer to $5,500, and whether it's joint or not. If you buy it and your married and the payments will continue when one spouse dies, you might be looking at a payment below that. The great thing about that is it's like creating your own pension, which means that check comes in every month or every year regardless what happens to stocks, what happens to bonds, what happens to interest rates, and you can't outlive it. It makes sense if longevity, long life expectancy runs in your family to have this type of an income annuity. I would take it from the bond allocation of your portfolio, not from stocks. You said that you just have stocks, still might be worth considering. I mean, if all you have as a retiree, you're 100% invested the stock market, you might be taking on too much risk. You might take some of that and ratchet it down a bit and then put some of that money into an annuity. Just for an example, let's say you decide that you think a 75% stock, 25% non-stock allocation is good for you. Maybe you take 5%-10% of that 25% and put that into an annuity. But again, mostly pays off for people will have a reasonable expectation of living at least an average life expectancy if not longer. If for some reason you have health issues and it's possible that you do not have an average or longer life expectancy, then an annuity would not make as much sense.