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retirement

Annuities With New Promises

Living benefits protect against market risk.

Immediate annuities have always been a reliable source of lifetime income for retirees. But that guaranteed paycheck has its downsides: The fixed payouts don't rise with inflation, and you can't gain access to the principal once you hand it over to the insurance company.Now dozens of insurers are offering a new way to get lifetime income, but with opportunities to cash out and for payouts to increase. These products with "living benefits" are actually variable annuities with income guarantees. You can diversify among stock and bond funds, and you can withdraw 5% to 6% of your initial investment every year.

There are two major types of living benefits. With a guaranteed minimum-withdrawal benefit, you can withdraw money at 5% or 6% annually for the rest of your life, no matter how your investments perform. If your investments do well, you can cash out your balance, although you may have to pay a surrender charge.

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A guaranteed minimum-income benefit also allows you to withdraw 5% or 6% annually, but only until you convert your account to a lifetime stream of payments. Once you annuitize, your payments are based on no less than the value of your original investment, regardless of market performance.

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David Schechter, 71, a retired computer consultant in Wilmette, Ill., is a convert to living benefits. He and his wife, Irene, 67, first bought immediate annuities, but worried that fixed payouts wouldn't keep up with inflation. They then turned to living-benefit products. "When the stock market is like a roller coaster, I'm comforted by the fact that not one cent of my deposited funds is actually at risk," he says.

How to Shop

Choosing a living-benefit product can be tough because each insurer offers its own twist. Also, these products are pricey -- you pay extra for the income guarantees, along with the costly, standard variable annuity fees. Seek expert advice to decide whether one of these products is right for you. Mark Cortazzo, a certified financial planner with Macro Consulting, in Parsippany, N.J., recommends that you:

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Compare fees. The products Cortazzo likes charge about 0.55% of the account balance per year for the guaranteed income benefit, plus 1.4% for the standard fee. Some companies tack on death benefits, which you don't need if your goal is to maximize lifetime income.

Shorten the surrender period. These annuities generally let you withdraw at least 5% of your account balance every year without paying a surrender charge. But many companies will try to sell products that levy up to 7% of your balance if you cash out within seven years. Instead, ask for the same annuity with a four-year surrender period or no period. These products may charge just 0.1% extra for a four-year period, or 0.15% to eliminate the period.

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Study the withdrawal amount. Depending on how the insurer calculates your benefits, a product that lets you take withdrawals of 6% a year may be better than one that lets you receive 7%. Some base your withdrawal on your original investment, while others let you increase withdrawals if your investment value rises -- letting you take 6% of a balance that has grown to $120,000, rather than 7% of an original investment of $100,000.

Cortazzo prefers the guaranteed minimum-income benefit over the withdrawal products. You can't cash out once you annuitize, but your payouts at that point tend to be higher. Right now, Cortazzo likes the minimum-income products from MetLife, AXA and Ohio National because of their "flexibility and great investment management."

Living-benefit annuities are best for people in their fifties and sixties who need to start withdrawing money within the next three years. The guarantee can be worthwhile because their retirement savings would suffer if they started withdrawing in a down market. Those in their seventies and older might do better with an immediate annuity.

EDITOR'S NOTE: This article was originally published in the August 2007 issue of Kiplinger's Retirement Report. To order a subscription, click here.

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