This Makes Sense For You If:

You have a guaranteed source of income sufficient for your needs, from Social Security and a pension, and your additional retirement funds are, well, extra.

THE STRATEGY: You invest in a diversified portfolio of stocks, bonds, and cash that has the potential to generate current income and capital gains. You limit your withdrawal rate to no more than 4% of your portfolio per year.

If you do this right and stick to it, you have a 77% chance of your money lasting 30 years, according to Ibbotson Associates. The higher the withdrawal rate, the lower your odds. Beware, though, that this will not work if going in you need more than the 4% just to get by.

THE DRAWBACKS: A sizable loss early in retirement could undo you. The Goal: For those without pensions, this is a perfect way to ensure lifetime, guaranteed income AND to still retain some control over your portfolio.

This strategy provides longer income security than the first because the payout from an immediate annuity can't be easily matched by another sure-bet investment. Current Immediate Annuity rates pay in the 7 to 8 % range for 68 year old males, which equates to $40,000 on a $500,000 investment. Look back at Plan 1 for a moment and see that using the 4% rule, you'd need $1M to pull out $40,000 per year, and you still have to sleep with only a 77% chance of success.<br /> What makes an Immediate Annuity pay so well? Investors' money is pooled, allowing insurers to essentially transfer funds from early croakers to those who hang on past life expectancy. This is known as a 'mortality credit' and while not a particularly nice term it can have significant benefits for you.

THE MAIN DRAWBACK: Once you invest in an immediate annuity, it's final- you lose flexibility and options. You can't spend the money, gift it, leave it to heirs, or take a vacation. Plus, the mortality credits work both ways, and if you die early you may be benefiting others and not yourself. For those reasons, many people perceive immediate annuities as potentially wasted money.

Another concern: Annuity payments are usually fixed, meaning they'll be worth less over time because of inflation. A few insurers offer inflation-adjusted immediate annuities, but the payout start considerably lower.

And lastly, be aware that you are exposed to some risk from the insurance company's overall credit quality- even though you offload big risks list longevity.

HOW TO PULL IT OFF: In reality, money in an annuity is no more "wasted" than the premiums you pay to insure your house. So try to get over that psychological hurdle, since this strategy presents your best chance of maintaining income.

To make it work, you want to devote enough to the annuity so that the income, along with Social Security and pensions, covers your basic expenses. But don't go hog wild as you loose a lot of flexibility- hopefully you have enough to have something left over after covering those basic needs. Plus, you'll need to use what's left to try to beat inflation, since your annuity payments won't. immediate annuities, immediate annuities pros and cons