A random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing

1. Desire to Leave a Bequest.
Suppose a retiree has saved a
substantial nest egg and can live comfortably off the
dividends and interest from the investments. While an even
larger amount of yearly income could be provided by
annuitization, there would be no money left over for bequests
when the annuitant dies. Many individuals have a strong
desire to be able to leave some funds for children, relatives, or
eleemosynary institutions. Full annuitization is inconsistent
with such bequest motives.
2. Flexibility of Consumption.
Suppose a couple retires in
good health at age sixty-five and purchases an annuity that
pays a fixed sum each year as long as either partner is alive.
Such a “joint life” annuity is a common way for couples to
structure their retirement. But right after signing the contract
with the insurance company, both husband and wife learn
that they have incurable diseases that are highly likely to
reduce the period each will survive to a precious few years.

---

The couple might reasonably want to take the around-the-
world trip they had always dreamed of. Annuitization gives
them no flexibility to alter their path of consumption if
circumstances change.
3. Annuities Can Be Costly.
Many annuities, especially
those sold by insurance agents, can be very costly. The
purchaser pays not only the fees and expenses of the
insurance company but also a sales commission for the selling
agent. Some annuities can thus be very poor investments.
4. Annuities Can Be Tax Inefficient.
While there are some
advantages to fixed annuities relative to bonds in terms of tax
deferral, variable annuities turn preferentially taxed capital
gains into ordinary income subject to higher tax rates. Also,
partial annuitization of retirement account assets does not
offset the required minimum distributions (RMDs) you must
take. If you annuitize 50 percent of your IRA, you still have
to take RMDs on the other half. This is no problem if you
are spending at least that total amount, but tax inefficient if
you are not.

---

So what should smart investors do? Here are my rules: At
least partial annuitization usually does make sense. It is the
only no-risk way of ensuring that you will not outlive your
income. Reputable companies, such as Vanguard, offer
annuities with low costs and no sales commissions. In order
to make sensible decisions on annuities, you should do some
comparison 
shopping 
on 
the 
Internet 
at
http://www.valic.com. You will find considerable variation in
rates from different providers.