Lifetime Annuities

Lifetime annuities are built into the typical defined benefits plan. They are also available for purchase. Author James Lang and the Retirement Risk Index look at annuity pros and cons and find only pros.

Defined Benefits Plan as Lifetime Annuities

Lifetime annuities may be defined as follows: income from capital investment paid in a series of regular payments. The traditional employer defined benefits plan is a type among lifetime annuities. It amounts to a contract that converts assets into guaranteed income for life. Because “guaranteed income” is an alluring promise, the annuity industry has been experiencing strong growth. Sales increased from $164 billion in 1999 to $264 billion in 2008.

Under the defined benefits plan, the guaranteed periodic payout, an annuity, is based on years of employment, pay history, age at retirement, and other factors. The benefits thus work like lifetime annuities.

Lifetime Annuities Available for Purchase

Lifetime annuities are available to anyone who can buy a contract. Proceeds from a 401k and IRA, for example, may be used to buy an annuity in order to guarantee the lastingness of retirement funds.

Annuity Pros and Cons from James Lang and the Retirement Risk Index: Don't We All Long for the Old Defined Benefits Plan?

Under today’s do-it-yourself form of retirement, funds in the company 401k or the personal IRA are not guaranteed to last. Their lastingness depends on withdrawal rates and unpredictable investment outcomes.

One way to beat that uncertainty is to exchange retirement money for an annuity. James Lang, retirement plan expert, recommends that all retirees annuitize a portion of their assets, perhaps 25%, to secure some cash flow, a guarantee available in the increasingly extinct defined benefits plan.

In a similar vein, the National Retirement Risk Index (NRRI) of the Center for Retirement Research at Boston College shows that the percent of households 'at risk' for retirement decreases from 60% to 51% after they purchase an inflation-indexed annuity to provide a guaranteed stream of retirement income rather than trying to live off of the interest from their assets.

Subtopics: Lifetime Annuities • Fixed vs. Variable Annuities