Annuities

This is also a question with no single answer. One should first establish a base level of retirement income according to one's present level of spending and lifestyle. Several approaches are possible:

• • No frills. The poverty level in 2000 was $8,350 for individuals and $11,250 for couples. If feasible, income should be at least 150 percent of the poverty level. In U.S. dollars in 2000, this would be $12,525 for individuals and $16,875 for couples.
• • Refocus. One should establish a budget that takes into account anticipated retirement expenses. For example, many retirees move to smaller, less expensive homes.
• • Aim high. Some people may be unwilling to retire with a reduced standard of living. It is a good idea to start with 70 percent of one's present income before taxes, and draw up a budget to pay for annual household expenses. Long-term costs like a new car and home maintenance need to be included.

It is also important to add up the guaranteed income that will be available to cover basic needs. Determine what income is expected from Social Security, which will cover part of one's base guaranteed income, then determine what income you can expect from pension plans. Annuity income from pension plans often is a better deal than an annuity bought in the open market. This is especially true for women because of unisex rates that pension plans must use.

If a pension and Social Security don't provide enough income, some people may wish to buy an annuity to get more guaranteed retirement income. If they do provide enough, it is a good idea to reevaluate at least every three years.

Retirement plans should take into account the possibility of the following major risks:

• • Inflation
• • Decline in value of savings and investments
• • Loss of ability to care for oneself or to make complex decisions
• • Being outlived by one's spouse or other dependents
• • Unexpected medical needs
• • Caring for parents or adult children

An annuity can pay for long-term care or life insurance, with annuity payments going directly to an insurance company to pay premiums for such coverage. However, premiums on long-term care policies are often not locked in permanently at one rate. They can be raised after a policy is purchased. Some insurers now offer a combined annuity and long-term care insurance policy. This can be a better deal than buying two products separately, but requires very careful shopping.