Consider Annuities for Reliable Retirement Income

Most investors try to accumulate as much money as possible to alleviate the worry of running out of it one day. And why not? The more assets you have, the less you should worry, right? If only that were true! Most retirees—even a good portion of the nation's 11 million millionaire households—worry about the possibility of running out of money fairly often. And if you ask people who retired in 1999 or 2007, prior to two of the biggest bear markets ever, they'd tell you that those worries are justified.

Of course, when the market is hitting new highs, people are on the verge of retirement may feel quite justified in expecting a return of 8% to 10% on their investments from now to forever. This may in turn cause them to believe that they can withdraw 4% or 5% for life from a non-guaranteed account with no worries.

Unfortunately, markets don't always cooperate—they fall from time to time. So it could be a bad bet to fully rely upon stocks sitting at all time highs or bonds at all time lows. If you lean heavily on risk-based assets to provide permanent income, you should probably expect a rocky ride.

Again, consider the period from 2000 to 2009. In that time, we saw the Millennial Crash from 2000 to 2003, which was a slow train wreck resulting in a swoon of almost 50%. Then after the real estate refinance boom from 2003 to 2007, investors were treated to another once-in-a-lifetime crash of nearly 57% from peak to trough starting in the fall of 2008 to the spring of 2009. Result? For that 10-year period, the broad market recorded a net negative return. So much for the idea that stocks always make 10%.

That kind of situation is the last thing you want to deal with in retirement. As a financial adviser who counsels retiring, affluent professionals, I have learned that many retirees who are taking steady withdrawals from accounts—while those accounts are losing value to the market—often experience real emotional distress.

Plus, as you move into your 60s and 70s, you will become less risk tolerant. Younger investors can look at market downturns as an opportunity to buy even more stocks. But that's not the way it is in the real world of retirement. Many of my clients, who were once fairly aggressive investors, suddenly—and fairly—don't want to lose any money once they retire.

Are bond mutual funds the answer?

Unfortunately, because interest rates on quality bonds have fallen to historic lows, bond funds will likely not be going up in value during your retirement, especially as interest rates are expected to go on a steady uphill climb. It is very important to remember that existing bonds lose value when interest rates rise. This is why bond mutual funds are at risk today. As the economy expands, and the threat of inflation returns, interest rates are expected to rise in response.

So you can't rely on the old dusty textbooks on retirement income that were written when bonds were paying 6% to 8%. The reality: the investment world has flipped for the ten thousand people a day who are retiring now. Where 20 or 30 years ago, bond rates were so high that risk averse retirees could leave the stock market completely and simply "live off the interest," today's bond rates don't offer that luxury.

A viable option, not a last resort

What's the conclusion? Many retirees find themselves retiring with a sizable income gap, which is the difference between their income and expenses. Their social security benefits will simply not cover all of their living expenses and their plans for travel, hobbies, etc. Unlike in decades past, many people are now retiring without pensions. And because bonds at low rates offer little refuge, and markets are unreliable, retirees know they cannot rely on their investments to provide the steady income they need.

This is why you are seeing strong demand for retirement annuities, especially fixed index varieties with income riders. An annuity is a contract with a licensed, audited insurance company to watch over your money and pay you for life, based on the institution's financial strength and claims paying ability. Annuities can be used for 401(k), 403(b) and IRA rollovers, to replicate many of the benefits of a pension. This may help alleviate the rational, math-based worry about running out of money.

Bottom line: A lifetime guarantee of income, not affected by stock or bond markets, can be very appealing. Indeed, annuities should command viable consideration.