Women should put 40% to 80% of retirement assets into lifetime income annuities, according to Lifetime Income for Women: A Financial Economist's Perspective, a paper by David Babbel, professor of insurance and finance at the Wharton School of the University of Pennsylvania. New York Life Insurance Company funded some of the author's research.
As reported in the paper, some women are hesitant to purchase income annuities because of the products' seeming inflexibility. However, Babbel argues that some carriers have taken care of this worry with fixed withdrawals for emergencies, limited protection against insurer insolvency, death benefits, and a refund of the investment to heirs if the policyholder dies shortly after purchase.
Babbel points out three popular retirement income approaches in the paper--annuitization of one's wealth; an investment in primarily fixed-income instruments; and an investment primarily in stocks, bonds, and mutual funds--though he favors the annuity method. The study argues that annuitization provides for greater control of wealth. The right combination of annuities enables women to: finance additional investments with remaining funds such as stocks, bonds, or mutual funds; create an emergency fund; or gift with little impact on their financial security, as the money is not needed to fund their remaining lifetime. Babbel also stresses that the market for lifetime income annuities has become very competitive, leading to new product features and better pricing.
Since women will need to receive, on average, 42 extra monthly payments to accommodate their extended life expectancy (a healthy male at age 65 stands a 50% chance of living beyond 85, while a female of the same age has the same chance of living beyond 88, research shows), the annuity payments are spread out over a longer period of time, resulting in a lower monthly income. However, women ultimately pay less than men for the same annuity when comparing the purchase cost with total benefits paid, Babbel reports. (A copy of the paper is available in the Web Extras section of the October 2008 online table of contents for www.investmentadvisor.com.)