You Don't Need Retirement Income...

That title will sound blasphemous to many people. How could you retire comfortably without income? The answer is simple, but often misunderstood. You don't need income. But you will need money to spend. How are those things different? Why would it matter? Let's make one thing perfectly clear. We are all going to die, we just can't know when, in advance. The Social Security department tells us that an average 65-year old man can expect to live an additional 19.3 years. A typical woman of that same age will likely need have 21.6 years left. Suppose you'd saved $200,000 by age 69 and were ready to retire. Shopping for a FDIC-insured five-year CD showed a best rate of 2.20%. The annual interest on your nest egg would equal $4,400, or $366.67 per month. Insurance agents and financial planners would be foaming at the mouth to sell you a lifetime annuity instead. The pitch? You can get $11,472 in annual income, or $956 monthly from the annuity rather than the lower income on a $200,000 bank five-year bank CD. That would equate to an additional $7,072 per year, $589.33 monthly, of retirement income. It will also typically generate a 6% upfront commission of $12,000 to the selling agent on a $200,000 annuity sale. Another key selling point is that you can never outlive the promised income. At first blush the extra monthly spending money might seem appealing. Delve into the details, though, and that annuity looks much less attractive. That New York Life payment includes $1,332 of annual taxable income, about 11.6% of the total monthly payment. At age 85, a bit past my statistical projected lifespan, I would have collected around $184,000 in cumulative annuity payments from New York Life. In essence, that was equivalent to less than I could have lived on had I simply withdrawn a similar amount from my own bank account if I'd deposited the money instead of buying that annuity. None of the principal withdrawn from the bank would have been taxable. More than 100% of the 'income' provided right through age 85 from the annuity was really just a return of my own money. If I die 'on schedule, according to actuarial tables my original $200,000 would have shrunk by almost $17,000 over about a 16-year holding period. I would have seen a negative total return, plus my heirs, or favorite charities, would collect nothing at all. Knowing that, does that annuity seem like a good investment choice? Withdrawing the same $11,472 each year from my bank account would have easily lasted well over 24 years at that 2.2% CD rate. By that time I'd have reached 93, something that is unlikely to occur. How much fun could money buy me at that ripe old age, even if I was rolling in dough? I could have lived a richer life, paid no taxes on my nest egg and almost certainly had substantial money left over by passing up the proffered annuity. The dirty little secrets of annuity salespeople are: The close-to-zero internal earnings rate on the annuity products. The confiscation of your principal vs. being repaid at maturity. Worrying about running out of money leads many people to make very bad choices. Most of them were never told it was OK to gradually tap principal to live on as you get older. Avoid annuities. Keep your money invested in CDs, money markets, stocks and bonds. Supplement your actual income by drawing down your own cash. That's exactly what the insurance companies are doing without saying so. You'll only know how terrible most annuity payouts turned out to be after you're dead. It will be too late to complain about it by then. I'll end with this; I was insurance licensed years ago when I first worked for brokerage firms. I never sold annuities, nor did I own any.

You Don't Need Retirement Income...

But you do need money to spend, and, unfortunately, you'll only know how terrible most annuity payouts turned out to be after you're dead.

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