From the March 2010 issue of Boomer Market Advisor • Subscribe!

What Color Is Your Retirement Zone?

Occasionally people come along who not only know their business, but can share what they know through clear writing and speaking. I value such people. I listen for them the way you'd listen for a clear radio signal in a spectrum of noise.

Jim Otar is such a person. A naturalized Canadian who lives in suburban Toronto--he was born near Istanbul--Otar abandoned engineering in the early 1990s to manage money. As a boomer, he soon focused on generating retirement income.

With annuities, of all things.

To be sure, Otar is no annuity cheerleader. But in his workshops and in the book he published in October 2009, he argues that most boomers who want serene, secure retirements will need inflation-adjusted income annuities.

In this short space, I'll try to convey how Otar determines who will need annuities and, if they do, how much money they should annuitize.

Otar assigns all of his mature clients to one of three color-coded zones--the Green Zone, Gray Zone or Red Zone. Clients' zones aren't determined by their wealth, but by the amount of income their wealth has to produce each year in retirement.

For instance, a client with $1 million who needs to draw down $30,000 a year belongs in the Green Zone. If he needs $50,000 a year, however, he falls into the Gray Zone. If he needs $100,000 a year, he's in the Red Zone.

The Green Zone is obviously the place to be. A Green Zoner's money should last forever because he won't spend more than about 4% of it per year. Four percent may sound familiar: it's the traditional "sustainable" withdrawal rate.

Retirees in the Gray and Red Zones face a potentially much riskier retirement. They need more than 4% of their money each year. But at that withdrawal rate, the odds are steep that they won't be able to maintain their standard of living or afford proper nursing home care or leave a bequest.

These folks will need to buy inflation-adjusted life annuities, Otar says. Red Zoners--i.e., most boomers--won't have many options. They'll have to work longer, become more frugal and annuitize most of their savings. Or pray for luck.

Those in the Gray Zone--where most of your clients probably live--have wiggle room. But to ensure their living standard, to be sure they can afford nursing home care if they need it, and to leave a bequest, they'll need an annuity, long-term care insurance and life insurance.

Practical, simple and elegant is how I'd describe Otar's method for calculating how much of their wealth Gray Zoners should annuitize. They don't need an annuity big enough to generate all of their income. They just need enough annuity income to keep the annual withdrawal rate from their invested assets below 4%.

My summary of Otar's method doesn't do it justice, however. To access his description, visit or read Otar's book, "Unveiling the Retirement Myth." It's a clear signal breaking through the noise.

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

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