Pensionizing Assets- Annuities for Retirement Income

Annuities, like pensions and Social Security, offer the promise of lifetime income, something no other investment class can do. With stocks, bonds, real estate, and other alternatives, income that one cannot outlive is a risk-based probability (and a hard one to figure accurately), not a certainty. With annuities, so long as the insurance company stays in business and honors its promises, lifetime income is guaranteed. This is why lotteries and pensions often turn to annuities for funding, and it is an extremely powerful proposition. We explored earlier in this paper the various ways that annuity payouts can be figured based on single and multiple life expectancies, and contractual provisions like variable, equity index, and guaranteed withdrawal benefit rider accounts can complicate the income math and opportunity/risk permutations quite a bit.

This lifetime income feature is so important that in many cases it counterbalances and even overcomes the many shortcomings that particular annuities may be saddled with, including high costs, high taxation, illiquidity, and others. For those whose asset levels are such that the ability to ensure lifetime income is uncertain—true for many but not all consumers—annuities should be seriously considered to fill the income gap, especially for those whose only true pension is Social Security, or for whom pension income is comfortable only so long as both spouses are living. For many, converting some assets to lifetime income—which I call pensionizing—is an important strategy, which should merit serious consideration and analysis. Unfortunately, this analysis (how much asset value to convert, what income deficit must be funded for, and when, and which annuity products offer the lowest costs, best value and most applicable features for a given consumer’s needs) can be extremely complicated, and is probably best not left to a given commission salesperson’s advice.

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