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Retirement

5. Consider an Annuity

Concerned that you'll outlive your money? One solution is to use a portion of your savings -- usually no more than half your nest egg -- to buy an immediate annuity that will guarantee you income for the rest of your life.

Concerned that you'll outlive your money? One solution is to use a portion of your savings -- usually no more than half your nest egg -- to buy an immediate annuity that will guarantee you income for the rest of your life. A traditional annuity has several flaws. You relinquish a large chunk of your assets, and if you die prematurely, the insurance company keeps the money unless you pay extra to pass on the benefit to a surviving spouse or continue payments to a named beneficiary for a set number of years. Plus, inflation eats up the buying power of your fixed payouts.

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The insurance industry is selling new varieties of immediate annuities that offer you more choices and more control. For example, New York Life sells an immediate annuity with a "changing needs" option that lets you raise or lower payouts to accommodate your situation. If you owe five years of payments on your mortgage, for example, you can take more income now and reduce the amount after the debt is paid. Or, if you fear your savings will run dry in 20 years, you can choose a smaller payout up front and arrange to boost your income later.

A new deferred annuity from Prudential lets you gamble for growth by investing in a variety of accounts that resemble mutual funds but guarantee you a minimum return of at least 5% a year, regardless of market performance. If the investments outperform the guaranteed return, you can base your annual withdrawal on the higher balance.

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Those added guarantees come at a price, however. For example, if a 65-year-old married couple invested $100,000 in a traditional fixed immediate annuity, they would receive payouts of about $7,000 a year as long as either of them lived.

If the same couple bought a deferred annuity with a minimum-earnings guarantee, they would receive only about $5,000 a year if they began payouts immediately. But the longer they waited to use the annuity balance for income, the more guaranteed principal they'd build up, resulting in larger monthly checks for life. And once the surrender period disappeared, they could cancel their deferred-annuity contract and collect their remaining balance, if there was any left over.

The minimum-earnings guarantee and assured income for life made sense to Bill and Amanda Cichanski. Bill, 62, is a design engineer in Tacoma, Wash., who is scaling back his hours as he makes the transition to retirement. He and Amanda, a legal nurse consultant, have been planning an exit strategy that will allow them to travel and pursue outdoor sports, such as hiking and fly-fishing. Bill recently put $300,000 into one of the new-style Prudential annuities. He plans to rely on other retirement savings first, letting his annuity balance grow. "It allows me more control than an immediate annuity, and whatever's not used can go to Amanda," he says.

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