08/06/2013 05:55 pm ET Updated Oct 06, 2013

More Retirement Income

When it comes to thinking about retirement, you can divide middle-aged American workers into three groups.

There are people who know they'll never be able to "retire" in the traditional sense of the word, since they haven't saved hardly anything, so they'll have to keep working as long as they possibly can.

And then there are very wealthy people, whose main concern is how much money they will leave to their children and grandchildren. They worry about what to do with the "leftover" money when they die.

And then there is the group that likely includes you -- because you are taking the time to read this article!

You are just hoping your money lasts as long as you do. You're trying to figure out how much is "enough" -- and how to stretch it out over your lifetime. You worry about outliving your money, and you worry about low-interest rates which won't give you enough income, and you worry about the risks you must take to earn more income. So you keep working, and keep saving -- and keep your fingers crossed that it will all work out.

Now there is an interesting new product designed to help you guarantee some income in retirement, diminishing some of those worries. It's a form of annuity that allows you save money while you're working -- and start taking lifetime income payments later, when you retire. And, if you buy from the right company, you might even get a boost in your income along the way during your retirement years.

Annuities 101

First a word about annuities, in general. These are contracts made with an insurance company, so it's very important that you deal only with strong, highly rated companies.

There are two kinds of annuities -- immediate and deferred. With an immediate annuity you give the insurance company a lump sum of money, and they promise you a check a month for life. The amount is based on your age, and on interest rates (so the insurance company can invest the cash to keep its promise).

It's important to know that with an immediate annuity, once you start taking the checks they won't stop coming in your lifetime. But if you die sooner than you -- or the insurance company -- expected, then your heirs don't get any of the money back.

A tax-deferred annuity lets your money grow, either at a fixed rate or in investment sub-accounts, until you decide to take the money out -- either in a lump sum, or small pieces or a lifetime stream of income. The amount you can withdraw depends on the interest you have earned, or the gains in your investments inside the annuity. You pay taxes on those gains when you withdraw the money.

And it's important to know that there are always fees and charges associated with annuities -- mostly in the form of high penalties for early withdrawal from those deferred annuities, typically for the first 5-8 years.

Retirement Income Annuities

Now, the latest wrinkle in annuities offers an attractive opportunity for at least a portion of your retirement savings. These annuities are products you buy now, while you are working, perhaps in your fifties -- but don't start taking that income until you retire in your late 60s. Because you agree to wait, a smaller amount of money put into the annuity gives a larger stream of income when you retire. In fact, delaying just ten years to start taking the money stream could give you 50 percent more income than if you had waited to buy the annuity at retirement!

As an example, Northwestern Mutual offers its recently introduced Select Portfolio Income Annuities, which accept a single premium deposit you can make with tax qualified funds from an IRA rollover account, old 40l(k) sitting at a previous employer or other qualified retirement plan.

You can start taking income immediately, or within 13 months -- OR you can wait as long as decades into the future.

And that's where this deal really starts working to create retirement income. Of course, the longer you wait to take the income, the larger the monthly check (and the shorter your life expectancy). You can even designate the check continue to be paid over the life of your spouse who survives you. Or for a minimum 20-year period, and longer if you live. Those alternatives do lower your monthly check.

The attraction of this deferred income annuity is certainty. You know that the amount of the check can never go down, and that you'll continue receiving the checks as long as you live.

And there's a potential bonus, which is unique to Northwestern Mutual. Since Northwestern is a "mutual" company, owned by policyholders, the company may declare dividends on its policies. You can use those dividends to increase your monthly payment -- or take them out in cash -- or decide each year how much of the dividend to save or spend. The dividends are not guaranteed, but depend on the company's profits, and have been consistently paid over the company's 156 year history, even during the latest financial crisis. And Northwestern Mutual is the top-rated of all major life insurance companies when it comes to insurance company safety.

Annuity Drawbacks

There are drawbacks to any fixed income annuity. That monthly check, which seems so generous now, might not keep up with inflation. (Any dividends would help solve this problem). And since companies are calculating checks based on today's low rates, waiting might get you a higher return, though it would cut into the time your money has to grow. And then, once you take the regular checks (annuitize) if you die, and haven't opted for some kind of death benefit, or spousal survivor program, the insurance company keeps the balance of your investment.

But if you're looking for income down the road to supplement your Social Security, a Deferred Retirement Income Annuity makes sense to guarantee at least some income, in addition to Social Security. That will allow you to maintain other retirement assets in conservative stock market funds, where you hope to get growth to match or exceed inflation. It's easier to take that stock market risk, if you know you have a steady stream of lifetime income. And that's The Savage Truth.