If you're nearing retirement, you may be concerned about how best to stretch your nest egg in an unpredictable and expensive market. Although the 4 percent rule has been around for years -- allowing you to withdraw 4 percent of your portfolio each year to preserve your principal -- recent market changes have left financial analysts leery of telling clients they can withdraw this much during down markets without causing permanent damage to investment principal. Annuities have always been presented as a safer option for a fixed annual income for the rest of your life. When should you purchase an annuity, and when should you withdraw funds you've invested in the stock market? Read on to learn more about when an annuity may be your best choice.
What is an annuity?
An annuity is a type of permanent, fixed investment that will provide you with annual income for the rest of your life in exchange for an initial lump sum investment. The earlier in your working life you purchase an annuity, the longer the invested funds have to accumulate, and the greater your annual income will be when you begin making withdrawals. Annuities can take away much of your worry about having enough saved for retirement by allowing you to calculate exactly how much income you'll have each year.
Annuity rates can vary based on the current stock market. If you purchase an annuity in a down market, it may be cheaper -- but it may also offer less income than you can get in a pricey market. Purchasing an annuity sooner rather than later is generally always best, regardless of current market conditions, because the funds can remain invested and take advantage of capitalized dividends for years or even decades.
When should you purchase an annuity?
If you're planning to enter retirement with a certain amount of fixed expenses (like a mortgage, health insurance, or high property taxes), you may benefit from the guaranteed regular income of an annuity. Leftover invested funds can be withdrawn in good market conditions to help fund one-time projects or vacations, while you use the annuity to pay your fixed bills.
If, on the other hand, you have ample investment income and are able to buckle down on your budget during lean years, you may be able to withdraw an adequate amount of annual income from your investments without needing the extra income an annuity can provide.