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A Case for Annuities in Retirement

Last update on: Feb 02 2017
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Journalist Evan Simonoff recently attended a conference on global retirement issues and wrote a summary of the discussions. The aging population creates an increased need for a reliable income stream. Much of the conference focused on how individuals can create that income stream and, in particular, annuities versus investing lump sums. It’s a good, balanced discussion that each of you would benefit from reading.

Merton then took over and focused on the world most of us are familiar with—the DC, 401(k) space. It’s the future, and Merton worries the vast majority of participants are focused on the wrong number as they fix their attention on a dollar amount when they should be looking at an income stream.

The upshot, according to Merton, is that almost everybody in a defined contribution plan faces an asset/liability mismatch and many are clueless about how to grapple with it. A deferred annuity involves taking high risk in terms of one’s wealth, and that’s a key reason it’s not popular. However, Merton said that it also entails lower risk in terms of income.

Over the next decade, millions of Americans are going to be forced to face a dilemma about income preservation versus wealth preservation. If interest rates remain low, payouts from annuities will stay at 60% or 70% of what an annuitant could receive in a normal interest-rate world.

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