When it comes to funding your retirement
dreams, it’s important to look at all available investment options and then
structure a portfolio that provides regular income for as long as you’ll need
it. Annuities could be a good option, but how do you know how much to allocate to
annuities as compared with other investments?
As you know, creating a portfolio usually
involves allocating assets to a mix of stocks (so your assets can keep pace
with inflation) and bonds (so you’ll have a steady income stream). You’ll
probably also want to have some cash on hand, and you may want to consider an
investment in annuities.
To decide how much to allocate to an annuity,
you could consider it a part of your bond allocation. That’s because allocating
some of your nest egg to an immediate annuity creates a stream of income you
can’t outlive, helping you overcome “longevity risk” – the risk that you’ll run
out of money before you die.
Ask yourself what you think the stock
market will do, and decide what your tolerance is for investment risk. Also
consider whether you’re likely to burn through your assets earlier than you’d
planned.
A significant allocation to an immediate
annuity might be a good option under the following conditions:
·
When the stock market appears to be peaking or in the
early stages of a decline
·
When your tolerance for investment risk is low
·
When there’s a high probability you’ll exhaust your
assets
earlier than you wish.
Annuity guarantees rely on
the financial strength and claims-paying ability of the issuing
insurer. The IRS may also impose a 10% penalty on withdrawals prior
to age 59 ½, depending on the circumstances.
