An Immediate Annuity Is a Good Income Choice, Says Guru Mark Warshawsky

Retirees always face choices about how to invest their money and what mix of investments is the best way to go. Retirement financing guru Mark Warshawsky has carried out research that suggests more retirees should consider making an immediate annuity part of their retirement portfolio. He explains his findings in this report.

Mark Warshawsky

Mark Warshawsky

Warshawsky says that the data in the study indicate that an immediate annuity would in some cases work better than a systematic withdrawal strategy like the four percent rule. The immediate annuity provides a higher return conditional on the beneficiary’s survival. In other words, the return could be better than the return using the four percent rule.

This works, Warshawsky explains because of the mortality credit. In essence, it means that, because mortalities are pooled, those who live longer get a benefit from those who pass away earlier. If a retiree’s concern is income rather than leaving a bequest for family members or others, the immediate annuity is a very good approach.

The great recession, the phasing out of pensions, and the highly-marketed concept of the lump sum retirement number can make the income decision difficult. But, Warashawsky notes, it’s a decision people have to make, difficult or not. It is a psychologically difficult choice to make for people who have watched account balances grow for years. “People get a little attached to that money.” But if you want income, you have to part with some of that money.

Warshawsky also suggests that annuitizing part of a portfolio can be a good choice that can save some money.

Mark J. Warshawsky is a visiting scholar at the Mercatus Center of George Mason University. His research interests include employer-sponsored retirement programs, social security, financial planning, health and long-term care financing, corporate and public finance, and macroeconomics. Retirement News Today is a featured network of the Sequence Media Group.