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What’s Your Greatest Retirement Fear?


The prevailing wisdom in the world of retirement advice is that a retiree’s greatest fear is the possibility that he will outlive available retirement assets. Accordingly, the view is that a retiree would be willing to trade almost anything in exchange for the certainty of a retirement income that lasts as long as he does. So why are so few people actually willing to buy the one retirement income product that most effectively solves this problem?

Unlike most annuity products, an immediate annuity is pretty straightforward: you write one big check to the annuity company, and in exchange they write you a check every month or year for the rest of your life, however long you may live. For instance, according to, a 65-year-old married couple can turn over $250,000 in exchange for $1,342/month ($16,104/year), which continues to be paid as long as either member of the couple is still alive. If the longest-living member of the couple only makes it until age 75, they’ll only get back $161,040 in cumulative payments; if one lives until age 85, they’ll get $322,080; until age 95, $483,120; and if someone makes it to age 100, the couple will collect $563,640.

If you do the math, these aren’t necessarily the most fantastic of returns, even in the long-run scenario. But they’re pretty decent: You’re implicitly earning about 5.4%, guaranteed, through age 100, arguably not awful in today’s interest rate environment. And your returns move in line with your longevity; the longer you live, the higher return you get, which is exactly what you want if you’re worried about outliving your money. In fact, because of the lifetime guarantee, you literally can’t outlive the income stream (assuming, of course, you do business with a high quality annuity company that sticks around).

So an immediate annuity would appear to be the ideal solution to the risk of outliving your income. But almost no one wants to buy one. Yes, if you don’t live a long time, you lose the principal left over, but that’s the tradeoff. If you someday live to be the oldest man or woman in the world, the annuity company will still be writing you a check. If the only concern was outliving the money, you shouldn’t care that you don’t keep the principal if you die sooner, rather than later,, as long as you get the income for as long as you do live.

But most of us do care. We seem afraid of immediate annuities. Notwithstanding the simple lifetime income guarantee, we don’t seem to want to buy them very much. I’m not to trying to convince you of the value of immediate annuities, but instead to simply ask the question: why don’t we like them as much it seems like we should? What is it about the trade-off that is unappealing? Is it the lack of upside, even though some lifetime income is guaranteed? Are we terrified of long-term inflation (as most immediate annuities are not inflation-adjusted)? Is the legacy you leave your heirs of such importance that you’re really willing to not have a lifetime income guarantee, just to ensure your children – and not the annuity company – get whatever is left over? Is outliving your money really your greatest fear, and if so, why isn’t an immediate annuity appealing?

Michael Kitces, CFP, is the director of research for Pinnacle Advisory Group, a private wealth management firm located in Columbia, Maryland that oversees approximately $850 million of client assets.  He is the publisher of the e-newsletter The Kitces Report and the blog Nerd’s Eye View through his  Kitces is also one of the 2010 recipients of the Financial Planning Association’s “Heart of Financial Planning” awards for his dedication to advancing the financial planning profession.  Follow Kitces on Twitter at@MichaelKitces.


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    • I think the inflation risk should be discussed. Sure, $16,104 a year ($1,342 a month) sounds great, but if you assume 3% inflation, in 20 years that $16,104 per year will equal $8,916 ($743 a month) in today’s dollars. That’s a 44% drop in purchasing power. I think that’s a big deal.

    • Tressco / Step 1:END THE FED!!! Usury, once in control, will wreck any ntoain. Until the control of the issue of currency and credit is restored to government and recognized as its most sacred responsibility, all talk of the sovereignty of parliament and of democracy is idle and futile. – William Lyon Mackenzie King The issue which has swept down the centuries and which will have to be fought sooner or later is the people versus the banks. – Lord Acton

    • While annuities are a very hlpeful tool available to you in your financial tool box, they shouldn’t be the only tool. I would venture to guess that those respondants that are so anxious to help you purchase an annuity stand to make between 4 and 7% commission on the initial transaction.Particularly in the distribution phase, annuities are a fantastic option. There are few if any options out there in the non-insurance world that offer you guaranteed income for life.If you are looking for continued growth on your money, the non-insurance world has a few options that offer more flexibility, ease of administration, and lower fees that annuities in general. That isn’t to say there aren’t good deferred annuity investment options out there, but they aren’t the clear slam dunk that all the insurance salesman claim they are. It sounds like you had an investment advisor that didn’t know what he/she was doing or he/she didn’t match your investments to your risk tolerance. Don’t let bad experiences with your financial advisor close the book on investment options that might still be appropriate for your situation. You mention that you had a diversified portfolio with 8 mutual fund (presumably stock) and 2 bond funds it is still possible that this portfolio was not appropriately diversified because the funds might have had holdings overlap or style drift.The one thing I would caution you don’t be too anxious to make another decision. Some of the options you are considering lock up your money for extremely long periods of time and limit your accessibility. Don’t let one bad decision chase you into another.

    • After Reading your article I could no lngoer hold back my disgusting grin in knowing that this article is full of tyrannical rules imposed upon everybody. I don’t care what class of people they are.For example : ..It is time to take back our health care. ?? What health care have we really had? We never had no law stating that health care was a right in the constitution. It is an opportunity. Our constitution gives us the ability to prosper and on and on. The Constitution does not give govt the right to impose their form of tyranny against companies who do not want to provide health care for free to those who can not pay for their services. That is one example on who is losing their freedoms first so we the polotarant are next.Next in the article states this Eliminating federal regulations that discourage small businesses from providing coverage. So we have regulations in place to discourage small business’? why?I thought we had liberty.Reform licensure requirements so that pharmacists and nurses can perform some basic functions to increase access to care and lower costs.So we are not free. We just think we are.HR 3075 provides truly comprehensive health care reform by allowing families to claim a tax credit for the rising cost of health insurance premiums.So govt has to make laws that allow people to do things that they do not want to do. If the rich lose their rights where does that leave the poor?

    • The largest impediment is the confidence to know that this one irrevocable decision is the right one to make.
      For others there’s an inherent resistance to placing a cap on the upside one can expect from a portfolio.
      Finally there’s a lack of clear information about what’s available and what is the best available product.

About Encore

  • Encore examines the changing nature of retirement, from new rules and guidelines for financial security to the shifting identities and priorities of today’s retirees. The blog also explores news that affects retirement, from the Wall Street Journal Digital Network and around the web. Lead bloggers are reporter Catey Hill and senior editor Jeremy Olshan. Other contributors include The Wall Street Journal’s retirement columnists Glenn Ruffenach and Anne Tergesen; the Director for the Center for Retirement Research at Boston College, Alicia Munnell; and the Director of Research for Pinnacle Advisory Group, Michael Kitces, CFP.