MONEY financial advice

Tony Robbins Wants To Teach You To Be a Better Investor

Tony Robbins vists at SiriusXM Studios on November 18, 2014 in New York City.
Tony Robbins with his new book, Money: Master the Game. Robin Marchant—Getty Images

With his new book, the motivational guru is on a new mission: educate the average investor about the many pitfalls in the financial system.

It might seem odd taking serious financial advice from someone long associated with infomercials and fire walks.

Which perhaps is why Tony Robbins, one of America’s foremost motivational gurus and performance coaches, has loaded his new book Money: Master The Game with interviews from people like Berkshire Hathaway’s Warren Buffett, investor Carl Icahn, Yale University endowment guru David Swensen, Vanguard Group founder Jack Bogle, and hedge-fund manager Ray Dalio of Bridgewater Associates.

Robbins has a particularly close relationship with hedge-fund manager Paul Tudor Jones of Tudor Investment Corporation.

“I really wanted to blow up some financial myths. What you don’t know will hurt you, and this book will arm you so you don’t get taken advantage of,” Robbins says.

One key takeaway from Robbins’ first book in 20 years: the “All-Weather” asset allocation he has needled out of Dalio, who is somewhat of a recluse. When back-tested, the investment mix lost money only six times over the past 40 years, with a maximum loss of 3.93% in a single year.

That “secret sauce,” by the way: 40% long-term U.S. bonds, 30% stocks, 15% intermediate U.S. bonds, 7.5% gold, and 7.5% commodities.

Tony’s Takes

For someone whose net worth is estimated in the hundreds of millions of dollars and who reigned on TV for years as a near-constant infomercial presence, Robbins—whose personality is so big it seemingly transcends his 6’7″ frame—obviously knows a thing or two about making money himself.

Here’s what you might not expect: The book is a surprisingly aggressive indictment of today’s financial system, which often acts as a machine devoted to enriching itself rather than enriching investors.

To wit, Robbins relishes in trashing the fictions that average investors have been sold over the years. For instance, the implicit promise of every active fund manager: “We’ll beat the market!”

The reality, of course, is that the vast majority of active fund managers lag their benchmarks over extended periods—and it’s costing investors big time.

“Active managers might beat the market for a year or two, but not over the long-term, and long-term is what matters,” he says. “So you’re underperforming, and they look you in the eye and say they have your best interests in mind, and then charge you all these fees.

“The system is based on corporations trying to maximize profit, not maximizing benefit to the investor.”

Hold tight—there’s more: Fund fees are much higher than you likely realize, and are taking a heavy axe to your retirement prospects. The stated returns of your fund might not be what you’re actually seeing in your investment account, because of clever accounting.

Your broker might not have your best interests at heart. The 401(k) has fallen far short as the nation’s premier retirement vehicle. As for target-date funds, they aren’t the magic bullets they claim to be, with their own fees and questionable investment mixes.

Another of the book’s contrarian takes: Don’t dismiss annuities. They have acquired a bad rap in recent years, either for being stodgy investment vehicles that appeal to grandmothers, or for being products that sometimes put gigantic fees in brokers’ pockets.

But there’s no denying that one of investors’ primary fears in life is outlasting their money. With a well-chosen annuity, you can help allay that fear by creating a guaranteed lifetime income. When combined with Social Security, you then have two income streams to help prevent a penniless future.

Robbins’ core message: As a mom-and-pop investor, you’re being played. But at least you can recognize that fact, and use that knowledge to redirect your resources toward a more secure retirement.

“I don’t want people to be pawns in someone else’s game anymore,” he says. “I want them to be the chess players.”

MONEY Longevity

Americans Are Living Longer Than Ever. And That May Kill Your Pension

With more workers likely to reach age 90, employers will have to step up their pension funding. Or, more likely, hand you a lump sum instead.

For the first time, both boys and girls born today can expect to see at least 90 years of age, according to revised mortality tables published on Monday by the Society of Actuaries. This represents a staggering extension of life over the past century. In 1900, newborns could not expect to see what is now the relatively youthful age of 50. But a big question looms: how we will pay for all these years?

In the last 100 years, the drumbeat of extended life expectancies has been interrupted during World War I and again during the Great Depression, but only fleetingly in any other period. Medical science and greater attention to health and nutrition have stretched lifetimes by a year or more every decade. In the new tables, newborn boys are expected to reach exactly 90 years of age—up from 87 in the last published tables in 2000. Girls are now expected to reach 92.8—up from 87.3.

This extraordinary expansion has changed every phase of human life. Only a few generations ago childhood came to an abrupt halt at ages 13 or 14, when boys went to work and girls married and started families. As lifetimes expanded, the teen years emerged and kids were kids longer. They went to high school and then to college. Today, the years of dependence have stretched even longer to 28 or 30 in a period recently defined as emerging adulthood.

Middle age and old age have also stretched out. Half a century ago reaching age 65 meant automatic retirement and imminent infirmity. Today, millions of 65-year-olds aren’t just in the workforce—they are reinventing themselves and looking for new pursuits, knowing they have many good years ahead.

According to the revised tables, which measure the longevity of those who hold pensions or buy annuities, a man at 65 can expect to live to 86.6—up from 84.6 in 2000. A woman at 65 can expect to live to 88.8—up from 86.4 in 2000. In another 15 years the typical 65-year-old will be expected to reach 90. And these are not necessarily years of old age; for many, most of these extra years will be lived in relatively good health.

What is good news for humanity, though, sends tremors through the pension world. Every few extra years of life expectancy come with a price tag. Already, many private and public pension funds are woefully underfunded—and the new tables essentially mean they are even further behind. Aon Hewitt, a benefits consultant, estimates that the new figures add about 7 percentage points to the amount a typical corporate pension must set aside.

So a typical pension that has only 85% of the funds it needs based on the old mortality rates now has only 78% of what it needs based on the new rates. This will almost certainly lead to a further erosion of individuals’ financial safety nets as pension managers try to figure out how to fill the holes. Already the majority of large companies have frozen or changed their pension plans in order to reduce their financial risk, while shifting workers to 401(k)s. Look for more employers to abolish their traditional pensions and to offer workers a lump sum settlement rather than remain on the hook for unknown years of providing guaranteed income.

“As individuals receive lump sum offers, they need to understand that their life expectancy is now longer,” says Rick Jones, senior partner at Aon Hewitt. “They need to be able to make the money last.”

Companies probably will have until 2017 before regulators require them to account for the new mortality rates, Jones says. That means, all things being equal, lump sum payments will be higher in a few years. For those on the verge of taking their benefits, it might make sense to wait. Public pensions, which generally are in worse shape than private pensions, will have to account for longer lives as well, though they are not subject to the same regulations and the adjustments will come slower.

The new figures also promise to speed changes in the 401(k) world, where both plan sponsors and plan participants have been slow to embrace annuities, which are insurance products that turn savings into guaranteed lifetime income. Savers have generally avoided certain annuities because they are seen as expensive and leave nothing for heirs. Lacking demand and facing legal hurdles, employers have also shied away.

Yet policymakers and academics have been arguing for a decade that 401(k) plans need to provide a guaranteed income option. The U.S. Treasury has been pushing the use of longevity annuities in 401(k)s, recently issuing guidelines for their use in target-date retirement funds. With a longevity annuity, also known as a deferred income annuity, you can buy lifetime guaranteed payout for a relatively small amount and have it kick in at a future date—say, age 80 or 85. And these days, even that’s not all that old.

Read next: You May Live Longer Than You Think. Here’s How to Afford It

MONEY stocks

WATCH: What’s the Point of Investing?

In this installment of Tips from the Pros, financial advisers explain why you need to invest at all.

MONEY retirement income

Boomers Are Hoarding Cash in Their 401(k)s—Here’s a Better Strategy

Paul Blow

Yes, you need a cash reserve in retirement, but you can go overboard in the name of safety. Here's how to strike the right balance.

As you close in on retirement, it’s crucial to minimize the risk of big losses in your portfolio. Given how expensive traditional safe havens, such as blue chips and high-quality bonds, have become, that’s tricky to do today. So for many pre-retirees, the go-to solution is more cash.

How much cash is enough? Many savers seem to believe that today’s high market valuations call for a huge stash—the average investor has 36% in cash, up from 26% in 2012, according to a recent study by State Street. The percentage is even higher for Baby Boomers (41%), who are approaching retirement—or already there.

That may be too much of a good thing. Granted, as you start to withdraw money from your retirement savings, having cash on hand is essential. But if you’re counting on your portfolio to support you over two or more decades, it will need to grow. Stashing nearly half in a zero-returning investment won’t get you to your goals.

To strike the right balance between safety and growth, focus on your actual retirement needs, not market conditions. Here’s how.

Safeguard your income. If you have a pension or annuity that, along with Social Security, covers your essential expenses, you probably don’t need a large cash stake. What you need to protect is money you’re counting on for income. Calculate your annual withdrawals and aim to keep two to three years’ worth split between cash and short-term bonds, says Marc Freedman, a financial planner in Peabody, Mass.  That lets you ride out market downturns without having to sell stocks, giving your investments time to recover.

This strategy is especially crucial early on. As a study by T. Rowe Price found, those who retired between 2000 and 2010—a decade that saw two bear markets—would have had to reduce their withdrawals by 25% for three years after each drop to maintain their odds of retirement success.

Budget for unknowns. You may be able to anticipate some extra costs, such as replacing an aging car. Other bills may be totally unexpected—say, your adult child moves back in. “People tend to forget to build in a reserve for unplanned costs,” says Henry Hebeler, head of AnalyzeNow.com, a retirement-planning website.

In addition to a two- to three-year spending account, keep a rainy-day fund with three to six months of cash. Or prepare to cut your budget by 10% if you have to.

Shift gradually. “For pre-retirees, the question is not just how much in cash, but how to get there,” says Minneapolis financial planner Jonathan Guyton. Don’t suddenly sell stocks in year one of retirement. Instead, five to 10 years out, invest new savings in cash and other fixed-income assets to build your reserves, Guyton says. Then keep a healthy allocation in stocks—that’s your best shot at earning the returns you’ll need, and you can replenish your cash account from those gains.

MONEY retirement planning

Why Gen X Feels Lousiest About the Recession and Retirement

THE BREAKFAST CLUB, from left: Molly Ringwald, Anthony Michael Hall, Emilio Estevez, Ally Sheedy, Judd Nelson, 1985.
Three decades after "The Breakfast Club" hit theaters, Gen X is still struggling. Universal—Courtesy Everett Collection

Sandwiched between much larger generations and stuck with modest 401(k)s, Gen Xers get no love from financial planners, marketers or media. No wonder they're feeling low.

The Great Recession took a heavy toll on all generations. Yet the downturn and slow recovery seem to have left Generation X feeling most glum.

Defined as those aged 36 to 49, Gen X members are least likely to say they have recovered from the crisis, according to the latest Transamerica Retirement Survey. They are most likely to say they will have a harder time reaching financial security than their parents. Gen X also is far more likely to strongly believe that Social Security will not be there for them and that personal savings will be their primary source of income in retirement.

“Generation X is clearly behind the eight ball,” says Catherine Collinson, president of the Transamerica Center for Retirement Studies. “They need a vote of confidence. But they still have time to fix their problems.”

Arguably, Gen X was feeling most beat up even before the recession. This group is in the toughest phase of life: kids at home, a mortgage, not yet in peak earning years. Mid-life crises typically hit at this age. Studies show that the busy child-rearing years tend to be the unhappiest of our life. The happiest years are 23 and 69 with a big dip in between.

And let’s not forget that Gen X is only two-thirds the size of Millennial (ages 18 to 35) and Baby Boomer (ages 50 to 68) populations. Marketing companies and the media have largely ignored this generation, which early on acquired the downbeat label: slackers. Collinson believes the financial industry is equally focused on older and younger generations, leaving Gen X all alone.

“They have to stake out a plan and pursue it on their own,” she says. “The harsh reality is people have to take on increasing responsibility for their own financial security.”

Maybe that’s why Gen X believes it must build a bigger nest egg. Asked for their retirement number, the median Gen X respondent said they need $1 million. Nearly a third said $2 million or more. The median figure for both Millennials and boomers was $800,000 with only 29% and 23%, respectively, saying they would need $2 million or more.

Perhaps Gen X is being realistic. Even $1 million won’t provide a cushy lifestyle. A 64-year-old retiring next year with that amount would receive an annual payout of only $49,000 a year, according to Blackrock’s CoRI index, which tracks the income your savings will provide in retirement. Looked at another way: purchasing an immediate annuity for $1 million today would buy $5,000 of monthly income, according to ImmediateAnnuities.com. Not bad. But less than most might expect.

Gen X has boosted savings since the recession, the survey found. The typical Gen X nest egg is now $70,000, more than double savings of just $32,000 in 2007. This suggests that Gen X did a good job of sticking to their 401(k) contribution rate during the downturn, buying stocks while they were low and enjoying the rebound. Millennials did a little better, going from $9,000 to $32,000. Baby Boomers were less likely to hang in through the tough times, partly because older boomers were already retired and taking distributions. The median boomer next egg has risen to $127,000 from $75,000 in 2007.

Overall, Baby Boomers felt the brunt of the downturn. They suffered more layoffs and wage cuts, took a bigger hit to their assets, and by a wide margin more Boomers believe their standard of living will fall in retirement. But at least many Boomers are still blessed with traditional pensions and have a better shot at collecting full Social Security benefits.

Millennials are old enough to have learned from the downturn but not so old that they had many assets at risk. This generation began saving at age 22, vs. age 27 for Gen X and age 35 for boomers. Millennials also benefit from modern 401(k) plan structures with easy and smart investment options like target-date funds and managed accounts.

Meanwhile, Gen X is largely pensionless and was something of a 401(k) guinea pig when members entered the labor force. Plans then were untested and lacked many of today’s investment options or any educational material. The plans may have been mismanaged, subject to higher fees or even ignored. Even today, the Gen X contribution rate of 7% lags that of Millennials (8%) and Boomers (10%). Gen X is also most likely to borrow or take an early withdrawal from their plan (27%, vs. 20% for Millennials and 23% for boomers). Some of this relates to their period in life. But they have other reasons to feel glum too.

Still, there is some hope for Gen X. Recent research by EBRI found that if this generation manages to keep investing in their 401(k)s, most could end up with a decent retirement—no worse than Baby Boomers. And they still have time. If Gen Xers raise their savings rate a bit more, they can retire even more comfortably.

Do you want help getting your retirement planning off the ground? Email makeover@moneymail.com for a chance at a makeover from a financial pro and to appear in the pages of Money magazine.

MONEY retirement income

5 Tips For Tapping Your Nest Egg

Cracked egg
Getty Images—Getty Images

Forget those complex portfolio withdrawal schemes. Here are simple moves for making your money last a lifetime.

It used to be that if you wanted your nest egg to carry you through 30 or more years of retirement, you followed the 4% rule: you withdrew 4% of the value of your savings the first year of retirement and adjusted that dollar amount annually for inflation to maintain purchasing power. But that standard—which was never really as simple as it seemed— has come under a cloud.

So what’s replacing it?

Depends on whom you ask. Some research suggests that if you really want to avoid running out of money in your dotage, you might have to scale back that initial withdrawal to 3%. Vanguard, on the other hand, recently laid out a system that starts with an initial withdrawal rate—which could be 4% or some other rate—and then allows withdrawals to fluctuate within a range based on the previous year’s spending.

JP Morgan Asset Management has also weighed in. After contending in a recent paper that the 4% rule is broken, the firm went on to describe what it refers to as a “dynamic decumulation model” that, while comprehensive, I think would be beyond the abilities of most individual investors to put into practice.

So if you’re a retiree or near-retiree, how can you draw enough savings from your nest egg to live on, yet not so much you run out of dough too soon or so little that you end up sitting on a big pile of assets in your dotage?

Here are my five tips:

Tip #1: Chill. That’s right, relax. No system, no matter how sophisticated, will be able to tell you precisely how much you can safely withdraw from your nest egg. There are just too many things that can happen over the course of a long retirement—markets can go kerflooey, inflation can spike, your spending could rise or fall dramatically in some years, etc. So while you certainly want to monitor withdrawals and your nest egg’s balance, obsessing over them won’t help, could hurt and will make your retirement less enjoyable.

Tip #2: Create a retirement budget. You don’t have be accurate down to the dollar. You just want to have a good idea of the costs you’ll be facing when you initially retire, as well as which expenses might be going away down the road (such as the mortgage or car loan you’ll be paying off).

Ideally, you’ll also want to separate those expenses into two categories—essential and discretionary—so you’ll know how much you can realistically cut back spending should you need to later on. You can do this budgeting with a pencil and paper. But if you use an online tool like Fidelity’s Retirement Income Planner or Vanguard’s Retirement Expenses Worksheet—both of which you’ll find in the Retirement Income section of Real Deal Retirement’s Retirement Toolboxyou’ll find it easier to factor in the inevitable changes into your budget as you age.

Tip #3: Take a hard look at Social Security. The major questions here: When should you claim benefits? At 62, the earliest you’re eligible? At full retirement age (which is 66 for most people nearing retirement today)? And how might you and your spouse coordinate your claiming to maximize your benefit?

Generally, it pays to postpone benefits as your monthly payment rises 7% to 8% (even before increases for inflation) each year you delay between ages 62 and 70 (after 70 you get nothing extra for holding off). But the right move, especially for married couples, will depend on a variety of factors, including how badly you need the money now, whether you have savings that can carry you if you wait to claim and, in the case of married couples, your age and your wife’s age and your earnings.

Best course: Check out one of the growing number of calculators and services that allow you to run different claiming scenarios. T. Rowe Price’s Social Security Benefits Evaluator will run various scenarios free; the Social Security Solutions service makes a recommendation for a fee that ranges from $20 to $250. You’ll find both in the Retirement Toolbox.

Tip #4: Consider an immediate annuity. If you’ll be getting enough assured income to cover most or all of your essential expenses from Social Security and other sources, such as a pension, you may not want or need an annuity. But if you’d like to have more income that you can count on no matter how long you live and regardless of how the markets fare, then you may want to at least think about an annuity. But not just any annuity. I’m talking about an immediate annuity, the type where you hand over a sum to an insurance company (even though you may actually buy the annuity through another investment firm), and the insurer guarantees you (and your spouse, if you wish) a payment for life.

To maximize your monthly payment, you must give up access to the money you devote to an anuity. So even if you decide an annuity makes sense for you, you shouldn’t put all or probably even most your savings into one. You’ll want to have plenty of other money invested in a portfolio of stocks and bonds that can provide long-term growth, and that you can tap if needed for emergencies and such. To learn more about how immediate annuities work, you can click here. And to see how much lifetime income an immediate annuity might provide, you can go to the How Much Guaranteed Income Can You Get? calculator.

Tip #5: Stay flexible. Now to the question of how much you can draw from your savings. If you’re like most people, an initial withdrawal rate of 3% won’t come close to giving you the income you’ll need. Start at 5%, however, and the chances of running out of money substantially increase. So you’re probably looking at an initial withdrawal of 4% to 5%.

Whatever initial withdrawal you start with, be prepared to change it as your needs, market conditions and your nest egg’s value change. If the market has been on a roll and your savings balance soars, you may be able to boost withdrawals. If, on the other hand, a market setback puts a big dent in your savings, you may want to scale back a bit. The idea is to make small adjustments so that you don’t spend so freely that you deplete your savings too soon—or stint so much that you have a huge nest egg late in life (and you realize too late that you could have spent large and enjoyed yourself more early on).

My suggestion: Every year or so go to a retirement calculator like the ones in Real Deal Retirement’s Retirement Toobox and plug in your current financial information. This will give you a sense of whether you can stick to your current level of withdrawals—or whether you need to scale back or (if you’re lucky) give yourself a raise.

MORE FROM REAL DEAL RETIREMENT

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MONEY financial advice

How Listening Better Will Make You Richer

140724_HO_Listening_1
Ruslan Dashinsky—iStock

A financial adviser explains that when you hear only what you want to hear, you can end up making some bad money choices.

Allison sat in my office, singing the praises of an annuity she had recently purchased. She was 64 years old, and she had come in for a free initial consultation after listening to my radio show.

“The investment guy at the bank,” she crowed, “told me this annuity would pay me a guaranteed income of 7% when I turn 70.”

I asked her to tell me more.

Allison had invested $300,000 as a rollover from her old 401(k) plan. She was told that at age 70, her annuity would be worth $450,000. Beginning at age 70, she could take $31,500 (7% of $450,000) and lock in that income stream forever.

“And when you die, what will be left to the kids?” I asked.

“The $300,000 plus all my earnings!” she said.

Suddenly my stomach began to sour.

Allison, I was sure, had heard only part of what the salesperson had told her.

I followed up with another question: “Besides the guaranteed $31,500 annual income, will you have access to any other money?”

“Oh yes,” she answered. “I can take up to 10% of the account value at any time without paying a surrender charge. In fact, next year I plan to take $30,000 so I can buy a new car!”

This story was getting worse, not better.

It was time to break the news to Allison.

I asked her to tell me the name of the product and the insurance company that issued it. Sure enough, I knew exactly the one she bought, since I had it available to my clients as well.

That’s when the conversation got a little tense.

I explained that if she withdrew any money from her annuity prior to beginning her guaranteed income payment, there was a strong likelihood she wouldn’t be able to collect $31,500 per year at age 70. Given the terms of the annuity, any such withdrawals now would reduce the guaranteed payment later.

She disagreed.

I explained that, with this and most other annuities, if she started the income stream as promised at $31,500, she would not likely have any money to pass on to the children.

She told me I was wrong — and defended the agent who sold her the annuity. She said that she bought a guaranteed death benefit rider so that she could protect her children upon her death.

I encouraged her to read the fine print. As expected, she reread the paragraph that stated that the “guaranteed death benefit” was equal to the initial investment plus earnings, less any withdrawals. When I told her that her death benefit in all likelihood would be worth nothing by age 80, she quickly said, “I need to call my agent back and check on this.”

I have conversations like this a lot, and not just with annuities. When it comes to investments, whether they’re annuities, commodity funds, or hot stocks, people often hear only what they want to hear. At various points in his sales pitch, the annuity salesman had probably said things like “guaranteed growth on the value of the contract,” “guaranteed income stream,” “can’t lose your money,” and “heirs get everything you put in.” What she had done was merge the different parts of the sales pitch together and ignore all the relevant conditions and exceptions.

When people hear about a product, there’s an emotional impact. “I want to buy that,” they think. They focus only on the benefits of the product; they assume the challenging parts of the product — the risks — won’t apply to them.

This story has a happy ending. Before Allison left my office, I asked when she received her annuity in the mail. “Three days ago,” she said.

I reminded her of the ten-day “free look” period that’s given to annuity buyers as a one-time “do-over” if they feel that the product they purchased isn’t right for them.

She called me back within two days. “The agent doesn’t like me very much,” she said. She had returned the annuity under the “free look” period and expected to get a full refund. The annuity salesman had just lost an $18,000 commission.

And I once again saw the wisdom of something I tell my clients every day: Prior to ever making a financial decision, it is absolutely critical you evaluate how this decision integrates into your overall financial life. That’s what’s important — not falling in love with a product.

———-

Marc S. Freedman, CFP, is president and CEO of Freedman Financial in Peabody, Mass. He has been delivering financial planning advice to mass affluent Baby Boomers for more than two decades. He is the author of Retiring for the GENIUS, and he is host of “Dollars & Sense,” a weekly radio show on North Shore 104.9 in Beverly, Mass.

MONEY 401(k)s

The New 401(k) Income Option That Kicks In When You’re Old

The U.S. Treasury allows savers to buy deferred annuities in their retirement plans. But no need to rush in now.

The U.S. Treasury Department has just given a tax break and its blessings to retirement savers who want to buy long-term deferred annuities in their 401(k) and individual retirement accounts.

The new rule focuses on a particular kind of annuity. These so-called deferred “longevity” plans kick in with guaranteed income when the buyer turns, say, 80 or 85 years old. For example, a 60-year-old man who spent $50,000 on a longevity annuity from New York Life could lock in $17,614 in annual benefits when he turned 80, the company said.

Like most insurance policies and traditional pension plans, these “longevity” plans take advantage of the pooling of many lives. Not everyone will live beyond 80 or 85, so those who do so can collect more income than they would have been able to produce on their own.

That takes the worry of outliving your money off the table. It also lets you take bigger retirement withdrawals in the years between 60 and 80. A saver who put 10% of her nest egg into one of these policies could withdraw as much as 6% of her retirement account in the first year instead of the safer and more traditional amount of 4 percent, estimates Christopher Van Slyke, an Austin, Texas, financial adviser.

A fee-only planner who tends to view many insurance products with some skepticism, Van Slyke likes these longevity plans for those reasons and because they convey a tax break, too: IRA and 401(k) money spent on these policies—up to 25% of the account’s value or $125,000, whichever is less—is exempt from the required minimum distribution rules that force savers over 70 1/2 to make withdrawals that count as taxable income.

The insurance industry loves this new rule, too, so consumers can be excused for taking some time to consider all the costs and angles. Treasury official J. Mark Iwry announced the new rule—declared effective immediately— at an annuities industry conference on Tuesday, and it was a crowd pleaser.

Related: Where are you on the Road to Wealth?

For retirement savers, the math just got harder. Should you buy such a plan? If so, when and how? What should you look for? Here are some considerations.

* You don’t have to rush. The younger you are, the cheaper these annuities are. A 40-year-old male putting down that same $50,000 with New York Life would get $31,414 in monthly benefits—almost twice the payout of the 60-year-old. But there’s a downside to that: Most do not have built-in inflation protection, points out David Hultstrom, a Woodstock, Georgia, financial adviser. So if you’re buying a $1,200-a-month benefit now but not collecting it for 20 years, you’ll be disappointed with its buying power. At a moderate 3% annual inflation rate, in 20 years that $1,200 would cover what $664 buys now.

* There are other reasons to wait. These policies are relatively new, and the Treasury’s rule “will open the floodgates,” Van Slyke says. Expect heightened competition to improve the policies. Furthermore, annuity payouts are always calculated on the basis of current interest rates, which remain near historic lows. A policy bought in a few years, in a (presumably) higher interest-rate environment probably would provide higher levels of income.

* Age 70 might be a good time to jump for those with lots of assets. Those required taxable distributions start the year you turn 70 1/2, so if you’re worried about the tax hit of taking big mandatory distributions, you could pull some money out of the taxable equation by buying one of these policies with it. Your benefits would be taxable as income in the year you receive them.

* Social Security is the best annuity. Before you spend money to buy an annuity, use money you have to defer starting your Social Security benefits as long as possible. Your monthly benefit check will go up by roughly 8% a year for every year after 62 that you defer starting your benefits. Social Security benefits are inflation protected, unlike these annuities.

* Think of your heirs. Money spent to buy an annuity is gone, baby, gone, so you can’t leave it to your kids. Some of these annuities will offer “return of premium” provisions. That means that if you die before you’ve received your purchase price back in monthly checks, your heirs can get the rest back. But that will probably cost you something in the first place. New York Life, for example, shaves almost $4,000 a year of annual payout for the 60-year-old who wants to add that protection to his policy. The heirs would get only cash that has been falling in value for all the years you’ve held the policy, not any income on that cash.

* This won’t solve your long-term care problems. The more money you have tied up in an annuity when you need round-the-clock nursing care, the less you have available to pay for that care. So if you want to use a longevity annuity to give yourself some income in those later years, you should also assure you have the big bad expenses covered. That means setting aside enough other money to pay the $7,000 to $10,000 a month it can cost for full-time nursing care, or buying a long-term care insurance policy you have faith in and can afford.

MONEY Ask the Expert

Should I Buy a Deferred Income Annuity—and When?

140605_AskExpert_illo
Robert A. Di Ieso, Jr.

Q: I’m interested in buying a deferred income annuity to supplement my income in my later retirement years. What is the best age to buy one? – Jeremy, Austin, Texas

A: As worries about running out of money in retirement grow, so has interest in deferred income annuities. Also known as longevity insurance, sales of these products hit $2.2 billion last year, double the amount in 2012, which was the first year of significant sales, according to Beacon Research and the Insured Retirement Institute.

Deferred income annuities are popular because they give you a hedge against outliving your money. They work like this: You give a lump-sum payment to an insurance company and in return, you get a guaranteed stream of income for life. In that way, deferred annuities are similar to immediate annuities. But with immediate annuities, the income kicks in right away. With deferred annuities, as the name suggests, the benefit payments don’t start until much later, perhaps 10 or 20 years down the road. Because the payments take place so far in the future, you can buy a bigger benefit with a deferred annuity compared to an immediate annuity.

Say you are a 65-year-old man today, and you deposit $50,000 into a longevity annuity that doesn’t start making payments for 15 years. You would get payments of about $1,300 a month starting at age 80. That’s another $15,000 a year in income. The longer you wait for the payments to kick in, the more you’ll get. In that same example, if you wait till age 85 for the payment to start, your monthly income jumps to $2,475. By contrast, a 65-year-old man who invests $50,000 in an immediate annuity today would get monthly payments of about $280 a month.

Of course, the downside is that if you don’t make it to 85 or whatever age you select for payments to start, you get nothing. You also need to consider that the benefits are not inflation-adjusted, so their purchasing power will have declined.

As for when to purchase the annuity, the younger you are, the better the deal. If you make the $50,000 purchase at age 55, instead of 65, with benefits that kick in at age 85, you will get 50% more income—$3,800 a month.

But first, you need to decide whether this move makes sense for you. That depends on your other sources of guaranteed income. If you already have a pension that covers most of your essential costs, you probably don’t need one. And the longer you can delay taking Social Security, which increases each year until age 70 and is adjusted annually for inflation, the less attractive it is to lock up money in an annuity. “Social Security is the best annuity income you can buy today,” says David Blanchett, director of retirement research at Morningstar Investment Management.

Beyond protection against outliving your money, however, deferred income annuities can give you peace of mind by reducing the stress of making your money last till you’re 100. “Longevity annuities remove a lot of uncertainty and that’s very valuable to retirees,” says Blanchett.

MONEY retirement income

Need Retirement Income? Here’s the Hottest Thing Out There

gold nest eggs
Joe Belanger / Alamy—Alamy

Sales of fixed annuities are surging as income-strapped retirees seek ways to rescue their retirement plans.

Annuity sales are exploding higher as retirees look to lock up guaranteed lifetime income in an environment where fewer folks leaving the workplace have a traditional pension. In a sign of wise planning, easy-to-understand basic income annuities are among the fastest growing of these insurance products.

In all, net annuity sales reached $56.1 billion in the first quarter—up 13% from a year earlier, based on data reported by Beacon Research and Morningstar. Variable annuities, often seen more as a tax-smart investing supplement for the wealthy than a vehicle for lifetime income, account for most of the market. These annuities, which essentially let you invest in mutual funds with some insurance guarantees, saw first-quarter net sales of $33.5 billion—down slightly from a year ago. (For more on the cost and potential risks of variable annuities, click here and here.)

Meanwhile, net sales of fixed annuities, which offer more certain returns, surged to levels last seen in the rush to safety at the height of the Great Recession—totaling $22.6 billion for the quarter. Fixed annuities come in simple and complex varieties—those indexed to the stock market can be confusing and laden with fees. But the subset known as income annuities—the most basic and straightforward of the lot—grew at a 50% clip versus 44% for the index variety.

Basic income annuities, also known as immediate annuities, remain a tiny portion of the overall $2.6 trillion annuity market. Yet they are what most investors think of when they ponder buying an income stream. With an immediate annuity you plunk down cash and begin receiving pre-set guaranteed income over a period of, say, 10 or 20 years, or life. Rates have been relatively low, as they are for most fixed-income investments. Recently a 65-year-old man investing $100,000 could get a lifetime payout of 6.6%, according to ImmediateAnnuities.com.

Another type of fixed annuity, called a deferred income annuity or longevity annuity, lets you put down a lump sum in return for income that starts years later —think of it as a form of insurance for old age. Though less well known, longevity annuities are increasingly popular, with sales reaching $620 million in the first quarter, up 57%, according to LIMRA, an insurance marketing research group. You can find other types of annuities designed lock up income, but the amount of the payout is often a moving figure and the fee structure can be difficult to understand.

Lifetime income has emerged as perhaps the biggest retirement challenge of our age. The gradual shift from defined benefit plans to defined contribution plans over the past 30 years has begun to leave each new class of retirees without the predictable, monthly stream of cash needed to cover basic expenses. The push is on to help these retirees convert their 401(k) and IRA savings to a guaranteed income stream. But innovation is not coming fast, and traditionally many investors have been reluctant to tie up their money in fixed annuities. So the quarterly sales trends are heartening. They suggest that individuals are acting to shore up a critical aspect of their retirement plan.

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