Short on retirement savings? Consider an annuity

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An annuity could be the financial lifeboat you need if you’re on the verge of retiring without enough savings.

Putting a portion of your money into one of these insurance policies will provide a monthly payment that's hundreds of dollars more than you could safely generate by investing it yourself.

The extra income can make a big difference for seniors struggling to pay all of their bills and enjoy retirement.

Those payments are also guaranteed for as long as you live, so you never have to worry about outlasting your savings.

Let's be clear. An annuity should be considered as a last resort, a way to rescue a money-strapped retirement, much like taking a reverse mortgage out on your home.

But for a growing number of seniors, it's an option worth considering.

In its basic form, a single-premium immediate annuity requires you to turn over a significant amount of money to the insurance company. Think $50,000. $100,000. Even more.

In exchange, the insurer commits to paying you a certain amount of money on a regular basis — usually monthly — for the rest of your life.

“Income annuities are for people who realize they want to increase their level of guaranteed income in retirement, usually to match the spending they need for their desired lifestyle,” says Ross Goldstein, managing director of New York Life.

Say you’re ready to retire and start looking at housing, food, health care and other monthly expenses. Perhaps you also want cash for travel, entertainment and hobbies.

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Look at what you’ll be receiving from your current investments. You might have money coming from a 401(k) or an IRA as well as Social Security benefits. If you’re going to receive a pension from your company, factor that in as well.

By reviewing your finances, you may find you won’t have enough from investments to cover monthly expenses during your lifetime. If that’s the case, you’ll need to do one of two things: adjust your lifestyle to reduce expenses, or look for ways to bring in more income to support your living situation.

How much money can you take out of your savings each month without having to worry about outliving your savings?

Investment advisers frequently use what's known as the Four Percent Drawdown Rule, which says you can start by taking out 4.5% of your savings the year after you stop working, then withdraw the same amount, adjusted for inflation, each year after that.

If you do this, the rule says your savings should last through at least 30 years of retirement.

So, if you have $100,000 in an IRA or 401(k) plan, you could plan on it providing $375 a month, or $4,500 a year, in retirement income.

With that same amount of money, you could purchase an annuity that makes higher monthly payments.

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Based on quotes from several large A-rated insurance companies, if you’re 65 years old and take out an immediate annuity of $100,000, you could expect to receive between $500 and $600 a month for as long as you live.

The exact payment you’ll receive depends on a number of factors, including your age and gender. Women typically receive a little less each month than men because of their longer life expectancy.

The older you are, the higher your annuity payment could be. For instance, if you’re 75 years old and take out an annuity that starts making payments right away, you could receive $100 more per month than at the age of 65.

You can choose to have an annuity that continues payments for as long as you live or limit the payments to a specific period of time, typically five to 25 years.

Or you can arrange to have the payments continue for your spouse or another specified heir after you die.

If you die during the first 20 years after purchasing the annuity, payments will continue to your beneficiaries until the end of the 20th year.

Opting to have payments go to beneficiaries can cause your monthly payments to be lower. You’ll have the security, however, of knowing your loved ones will continue to receive income in the event of your death.

You can view annuity payment options tailored to your particular situation at ImmediateAnnuities.com.

So why aren't these policies a smart buy for everyone?

“Historically annuities have been expensive,” says Joshua Mungavin, a financial planner at Evensky & Katz, a wealth management firm based in Coral Gables, Fla.

They always come with substantial fees and long, impenetrable contracts full of terms and conditions that are unfamiliar to even the savviest savers.

As a result, most buyers are heavily dependent on the information and advice of the agent they’re dealing with — a salesperson who’s being paid a commission by the insurance company.

That makes it easy for buyers to misunderstand — or be misled about — the costs they'll face and the benefits they'll receive, resulting in some nasty surprises down the road.

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Another problem is that fixed annuities pay the same benefit 10, 20 or even 30 years from now as they pay today.

“If you buy an annuity without a cost-of-living adjustment," Mungavin says, "you’ll find that inflation will eat away at what that money will buy in the future."

Of course, you can choose an annuity that adjusts payments for inflation, but the trade-off is that your initial benefits will be less.

Then there's the loss of that big lump-sum premium.

Single-premium immediate annuities usually require buyers to sign that money over to the insurer with full knowledge that they'll never be able to touch it again. Even if you purchase an annuity with a liquidity option, meaning you can get your money back in the future, you’ll likely face fees and penalties if you attempt to do so.

It won't be there for emergencies or to pass down to your children or other heirs.

That's why anyone considering an annuity should hire an independent professional financial adviser to review your expenses and potential sources of retirement income.

You can find one by using the Financial Planning Association’s website or going to the National Association of Personal Financial Advisors.

Be sure and choose a planner who charges a flat fee or hourly rate to advise you and doesn’t sell any of the annuities or other investments he or she might recommend.

Don't listen to anyone who says they'll do this for free. They aren't working for you.

Buying an annuity is one of the biggest financial decisions you'll ever make, and you need an expert on your side to make the right decisions.