A new rule of thumb seems in order for this time of financial stress for many retirees: "Annuitize and invest the difference."
This is not to suggest that retirees should put all, or even most, of their money into a life annuity. But for most retirees, putting 10% to 25% of their funds into life annuities, at one time, or over time, will not only give them more financial security, it will enable them to invest more effectively for the long term. 
The strong advantages of this approach can be easily demonstrated. Take the example of a retired 70-year-old man who needs $1,000 a month on which he can rely, a situation seen by most advisors. (I picked age 70 because it is in the 70th year of age that people must start taking required minimum distributions from their qualified plan accounts. However, the rule of thumb is applicable at somewhat younger and older ages, too.)
A common strategy for producing reliable income is the use of bonds, so this example will use bonds as an alternative. At the time of this writing, in early January 2010, a 10-year AAA-rated corporate bond was paying 3.44%. Thus, an investment of $349,000 is needed to produce $1,000 a month for 10 years. However, a 70-year-old man can get $1,000 a month, guaranteed for life, through payout from a lifetime income annuity for only $140,000.
Obviously, the "difference" in the cost of producing $1,000 a month for the two strategies is $209,000. This means that the person who annuitizes can invest this $209,000 "difference."
The key point: Annuitizing (or using a lifetime immediate annuity) produces income for a lower expenditure than does using other products. This frees up other money–the "difference"–to be invested effectively and for the long term. For retirees, this is crucial.
Critics of annuitization might oppose this strategy by citing one of two common myths.
Myth 1: This says that people who annuitize (or take lifetime annuities) leave smaller estates.
The example above can be used to debunk this myth. The Social Security mortality tables indicate that a 70-year-old man has a life expectancy of 13.3 years. If the invest the difference strategy only achieves an annual return of 5%, the $209,000 invested at age 70 would grow to $396,623 in that 13.3-year period. (Of course, people in average or above average health at age 70–the only people to whom most advisors would sell an income annuity–are likely to live much longer than that.) Thus, the truth is that those who annuitize and invest the difference are most likely to have a bigger, not smaller, estate.
Mathew Greenwald is president of Mathew Greenwald & Associates, Inc., Washington, D.C. His e-mail address is 
