116 • MARTIN H. RUBY
income number from above turns out to be) every year for the rest of my life? There could be a lot of variables that go into this calculation. After all, even when you start withdrawing funds from your ac- count, the remaining funds still can grow, most likely at a very conservative rate. So I’ve found the easiest thing to do is ask: If I wanted to buy an annuity that would deliver $188,240 (or your number) of an- nual income for the rest of my life, how much money would I need to buy it? If you’re not familiar with annuities, I’ll take a quick detour to explain. Annuities are essentially insurance contracts that deliver a set amount of annual payment for the rest of your life, no matter how long you live. If that sounds like a pension, you’re right. An- nuities are essentially a way for savers without a pension to pur- chase guaranteed annual income from their 401(k) or IRA. For most people over sixty-five, chances are at least some of their retirement funds are in an annuity. They’re a very common way to withdraw income from retirement savings. Now, I’m not encouraging you to go out and buy an annuity. But it’s a simple way to calculate how much money you would need to lock in a set income for your entire retirement. Back to our example. If you want to make sure you have $188,240 (or, of course, your number) every year for the rest of your life, you could purchase an immediate annuity that would de- liver that amount of income every year until you die. So how much would you need in your account to purchase that annuity? A general rule of thumb is you need fifteen times the amount of income you want to receive to purchase that annuity. There are plenty of websites you can visit for a more exact factor, but re- member we’re just estimating here, so I feel confident you can use a factor of fifteen.
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