To reduce the risk that you might outlive your retirement income, some experts advocate purchasing an “immediate” annuity that will pay as long as you live. Others favor building up a securities portfolio and taking systematic withdrawals, perhaps 4 percent or 5 percent each year. Annuities provide security while systematic withdrawals can offer inflation protection if your investments perform well.
Ibbotson Associates, an investment firm in Chicago, finds merit in both arguments. It suggests that retirees put 25-50 percent of their portfolios into immediate annuities and the balance in a systematic withdrawal portfolio.
With such an approach, the chances are greatly improved that you won’t outlive your income and you will have adequate protection against inflation. To Ibbotson, the percentage invested in annuities depends on many factors, including your “bequest desire.” The more you want to leave to heirs, the less you should have in annuities, which will expire with you.