Ben Stein How Not to Ruin Your Life

Most of the time, I talk to you, dear readers, about how to prepare for retirement starting some years before that time. But what about the person who is already in retirement or imminently retiring? The time for "primitive accumulation," as a famous crank once called it, is long past. Now the goal is to get the most money possible that will pay your bills and allow you to keep paying these bills until you enter immortality.

There are many ways to accomplish this, but before we discuss what I think is the best approach, let's consider how long your nest egg may have to last you and what prices will do in that time.

Americans who take fairly good care of their health are likely to live into their mid-80s and have a fine chance of living into their 90s. That means they need a stream of income that will last a long time.

And unless something totally unforeseen happens, the people who retire at 65 and enter heaven at, say, 85 will see close to a doubling of prices during their lifetimes. Such inflation may not affect everything, because if retirees stay in their homes and keep their same rattletrap cars (as I have), they will minimize those changes. But prices for food, clothing, travel, and especially medical care will rise.

Lifetime Income

In the olden days of American supremacy in world markets, retirees worked for their employer, got lifetime benefits with cost-of-living increases for pensions and health care, and lived peacefully. For most of us, those days are gone. We can no longer count on our employers' pension and health pools to keep us afloat. Delphi's recent bankruptcy and the possible bankruptcies at GM and Ford are stark reminders of that.

There are many aspects to solving this problem, but one comes to mind right away: Purchase a lifetime immediate annuity. This is a contract you make with a financial entity, usually an insurance company, which, in return for your initial payment, guarantees to make monthly payments to you -- for the balance of your life.

These annuities can be fixed, so that you get a certain sum each month. They can also have inflation adjustments, so they rise as inflation rises, and naturally these cost you and the insurer more.

Annuities can also be variable in nature, in which case payment amounts depend on stock and bond prices. But while your income from variable annuities, or VAs, will fluctuate, the payments have, in general over time, risen dramatically. VAs are generally managed by investment professionals in well-diversified equity-oriented portfolios. They can also track indexes, i.e., they can be unmanaged.

Variable annuities can also include a "death benefit." The owner can designate a loved one as a beneficiary, and he or she will keep receiving payments after the owner passes from the earth. According to the U.S. Securities & Exchange Commission, if you die, your beneficiary "will receive the greater of: (i) all the money in your account, or (ii) some guaranteed minimum (such as all purchase payments minus prior withdrawals)." Also, by contract, payments can continue for some stipulated period of years after the death, such as the decedent's life expectancy if he died before that date.

The best investment my father and mother, both distinguished economists, ever made was in VAs. Six years after my parents' death, the VAs are still paying out handsomely, and the payments are an immense multiple of what my parents paid in.

To summarize this, annuities are a way to rejoin the retirement pools that large employers used to have. Only this time, the pools are run by insurance companies. They know what they're doing, and they almost never fail. When they do, they're usually insured, at least in the larger states.

The VA's beauty is that it gives lifetime income. Plus, if the stock market rises, it also offers the promise of climbing income. Because stocks tend to rise over very long periods, you stand a good chance of having a lifetime earnings stream that increases as you age. In fact, if the stock market performs even half as well as it did in the 20th century, you'll comfortably beat inflation.

But Read the Fine Print

There are several little problems here, though. One is that the fees for annuities, especially, VAs, can be complex, hard to understand, and high. Before you buy, you need to have someone you trust explain exactly how the fees work, what they're for, and whether you need them or not. A fee for a cost-of-living increase might be a great bargain, but other fees might not.

Also, the kinds of VA features available are amazingly wide. Make sure you understand what every fee is for. Again, there are variations from company to company and product to product.

While annuities grow tax free until withdrawal, their fees may be such that they outweigh the tax advantages. And early or unplanned withdrawals may incur penalties. Factor in the fees and charges of the annuity you're considering, and see how the investment compares against qualified retirement plans or taxable mutual funds. Still, annuities' key benefit, which rival investments don't match, is the guarantee that the flow of income provided will last at least as long as your retirement.

Do your research thoroughly: Several great Web sites about VAs -- especially TIAA-CREF.com, Berkshire Hathaway Group, and retireonyourterms.org -- help explain these products and provide greater details.

Don't sign up if you don't understand the product, and make the sales person stay on the line until you fully understand it. Or keep reading until you understand it. (For income investments you can make yourself that deliver great returns and can rise with inflation, see "A Retirement Portfolio With Staying Power.")

Full disclosure: I'm Honorary Spokesperson for the National Retirement Planning Coalition, and some of its sponsors are insurers, and I do get paid for this work. You should know my interests, but they're not really conflicts of interest, since it's very much in your interest to have a lifetime flow of funds.