How do you help your clients avoid outliving their money?

One way, says Bob Stowe, a fee-only planner based in Plano, Texas, is to encourage them to use a portion of their assets to purchase an ordinary, straight-ahead immediate annuity without any bells and whistles.

This sort of annuity carries a minimal sales charge and doesn’t have to be purchased through a broker. It can be used, Stowe says, “as a replacement for some investment income and has the same effect on the client’s financial plan as having a pension—only in this case it’s self-funded.”

The client’s return actually improves when he or she annuitizes, Stowe explains. For someone 70 years of age, the conventionally accepted safe withdrawal rate from a retirement plan is around 4%. That compares with the 8% annual lifetime distribution a 70 year-old should expect to get from a simple annuity, effectively doubling his or her income on the portion of his portfolio that’s annuitized. In return, the client gives up any claim to the money and the client’s legacy decreases by the amount used to purchase the annuity.

Stowe says this strategy makes sense when a client is in danger of drawing down his portfolio and needs more income than he or she can get from the 4% sustainable withdrawal rate. The solution, he says, is to take a portion of the portfolio—between 10% and 40%—and shift it to an annuity. This could be done over time, so that as the client ages and his assets are depleted, every five years or so a larger portion of the remaining portfolio is shifted into an annuity. But for this strategy to pay off, Stowe says, the annuity’s return has to be at least double the client’s portfolio withdrawal rate.

By utilizing this approach, the client is trading legacy for return—but in so doing is actually helping to ensure his legacy. Since the client’s portfolio doesn’t have to contribute as much to his income, because the annuity side is contributing twice as much dollar for dollar, “That takes some of the pressure off of your portfolio and you now have a better chance for portfolio survival—meaning you actually increase the chance of having a legacy later on,” the CFP points out. “All of these possibilities become better—not worse—as a result of annuitizing part of the portfolio.”

There is a caveat: Normally, a seventy year-old would receive an income of $8,000 a year for life on a $100,000 annuity. But the annuitization rate is a function of two factors—interest rates and the insured’s life expectancy—and because rates are so low right now, the annuity’s return will be somewhat less than 8%. So clients should hold off on making the purchase until interest rates begin to recover.