This day and age the pension has seen a steep decline in popularity as society shifts away from the defined benefit plans and towards defined contribution plans like 401(k)’s or IRA’s. This shift has helped to generate a market for annuities which require a lump sum payment but offers a fixed monthly income stream, sometimes tied to inflation, that essentially replicates a pension in function if not form. However, annuities pose a dilemma for many since they must turn over a bulk sum that could draw gains elsewhere and removes much independence of action from retirees since their nest-egg can no longer be tapped when needed. As a result, many opt to forgo buying an annuity but depending on the situation they still might be a wise choice. Primarily, the retiree needs to maintain a reserve of cash that can continue to gain interest while also providing funds to cover large expenses, usually medical or long term care related, that cannot be paid from a smaller monthly income stream. In this situation for a retiree, an annuity can provide a steady stream of income to provide ordinary living expenses and suffers fewer of the downsides that someone who invest their entire savings into an annuity might face. Whatever the situation however, it is always wise to consult with a retirement planner, especially one who is paid for the advice and is not a salesman of any sort, before making any choice that involves such a large transfer of money.
See Christopher Farrell, Annuities as an Alternative to Shaky Markets? Not So Fast, The New York Times, January 29, 2016.
Special thanks to Joel Dobris (Professor of Law, UC Davis School of Law) for bringing this article to my attention.
