From the August 2009 issue of Boomer Market Advisor • Subscribe!

The do-it-yourself pension

When baby boomer couples anxiously sit in their financial advisors' offices to find out how much savings they'll need to afford a comfortable retirement, the "number" usually comes in somewhere north of $1 million.

Justification for that estimate is readily available. Tons of back-testing and countless Monte Carlo runs show that it takes a million to ensure a modest, inflation-adjusted income of $40,000 from age 65 to 100 (full disclosure: my grandmother lived to 100).

But unless you cater exclusively to the carriage trade, you know that most people won't save nearly that much by age 65. Only 19 percent of Americans over 55 have even $250,000, according to one source. And that was before the GFC (as in global financial crisis).

Which brings us to this month's topic: the deferred income annuity, or DIA.

DIAs are income annuities bought at a discount today for income tomorrow. A 55-year-old, for instance, might pay $100,000 today for a monthly income starting in 10 years. In short, a DIA is a do-it-yourself pension for people without one.

Not many insurance companies manufacture DIAs. Symetra Financial, based in Bellevue, Wash., does. Its Web site has a quote tool for financial advisors. Last week, the folks at Symetra and I worked up a few numbers.

A modest pension, it turns out, won't break the bank. According to Symetra, a 55-year-old man could buy a lifetime monthly income of $1,445, starting in 11 years, for $100,000, if he made it life-contingent, with no cash value or death benefit. (Quotes as of late June 2009.)

Most people won't risk buying a life-only contract or one with an indefinite return, so I got two more quotes. For $100,000 at age 55, Symetra would pay me (or my beneficiaries) $1,597 a month from age 65 to age 75, with a death benefit if I didn't reach 65. The same premium could produce $1,145 a month for life, with a commuted value paid to my beneficiaries if I died before payments began.

For a healthy 65-year-old with only $250,000, a DIA might look appealing. It provides much more income than either a single premium immediate annuity (SPIA) or the traditional 4 percent systematic withdrawal payment (SWiP) method. At age 65, for example, a $1,445-a-month income would require a SPIA premium of about $210,000 or savings of $433,000 (if a SWiP were used).

DIAs have a couple of obvious downsides. Interest rates or stock prices might rise, costing the client a shot at bigger gains or payout rates. Clients might also regard mutual funds or CDs as safer than an insurer's general account. And, of course, an annuity could reduce fee-based income.

On the plus side, a DIA could mitigate sequence risk, market risk and longevity risk - a threesome that may scare clients more than insurer default risk. And a DIA would give you a lifeline to throw to mass-affluent couples who stiffen when they hear "$1 million." Annuities may be a desperate measure, but they fit the times.

Kerry Pechter is the author of "Annuities for Dummies" and editor of retirementincomejournal.com.

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