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New products address retirement dilemmas

Updated: May 3, 2013 12:14PM

What's the scariest thing that can happen to a retiree? Running out of money. Only worries about health, which you can do little about, carry an equal worry-quotient.

One solution is to buy an immediate annuity that promises a check a month for life. But when you die, the checks cease, and the insurance company keeps the balance. Or you can accept a smaller monthly check to cover payments over your lifetime and that of your spouse.

But that fixed monthly check creates one more problem: What if today's dollars don't cover tomorrow's basic needs because of inflation?

An alternative is a tax-deferred variable annuity, an insurance company contract that enables you to invest in a choice of mutual fund-like sub-accounts. Your investment decisions determine the growth of your account, and withdrawals are taxed as ordinary income. But if your choices are bad, you might not have much to withdraw.

Tough choice

It's a tough choice for those reaching retirement age. You must keep your investments growing, but you may not replace stock market losses with new contributions. And you may not have time to wait until the market rebounds.

Now, some major insurance companies have recognized this retiree dilemma, and come up with products that allow you the investment equivalent of having your cake and eating it, too.

It's called the "living benefits rider," and it offers investment growth and withdrawals, too. There is a small extra cost. But it pays for potential growth, plus the promise that you can never run out of money during your lifetime.

Prudential Financial has sold billions of dollars in living benefits riders since the product was introduced less than two years ago. Other companies, such as John Hancock, are offering similar products, with slight differences, and you'll want to compare.

The Prudential living benefits rider that is added to most of its variable annuities constitutes a promise from the insurance company that your "protected withdrawal value" will grow at 5 percent annually. If you are willing to take out only 5 percent a year of that protected value, you will receive that income for the rest of your life or your spouse's life -- even if the investments in your account decline dramatically as a result of market activities and your withdrawals.

You can decide when to start taking that 5 percent annual withdrawal, and if your money has grown to be more than your original investment as a result of your investment choices, your protected withdrawal value will be the highest of three numbers: 5 percent compounded rate of return on your original investment until your first withdrawal; the highest value your contract attained at any anniversary of your original purchase during the first 10 years, or the current account value.

Best of all, if you ever need to dig into the principal you accumulated, you can do so (without penalty once the surrender period has passed) and still receive 5 percent annually on the protected value, less the amount you've withdrawn.

You can't speculate wildly in your investment account, knowing that you'll get this guarantee. There are specific and reasonably conservative sub-account choices for Prudential's "Lifetime Five" annuity rider.

The annual cost of the Lifetime Five rider, attached to any Prudential variable annuity, is an extra 0.60 percent of your account value. If you include your spouse, the rider costs 0.75 percent every year.

Of course, tax-deferred variable annuities have other basic costs, including steep surrender charges if you withdraw more than 10 percent of your investment in the early years.

Also levied is an annual fund management charge; an annual management charge for the investment fund sub-accounts; an annual "mortality and expense" charge that pays for a death benefit, which will give your heirs your original investment or growth in your account, whichever is greater, less any withdrawals at the time of your death.

In total you're paying about 3 percent annually of the account value during the first eight years for the peace of mind derived from the guarantee of lifetime income and the opportunity for investment growth.

I think it's worth considering for at least a portion of your investments as you approach retirement. And that's the Savage Truth.

Terry Savage is a registered investment adviser. Distributed by Creators Syndicate.

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