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How can I generate guaranteed income in retirement? Would an annuity make sense for me?

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Buying an annuity with part of your retirement money could help boost your retirement income and decrease your risk of running out of money.

Could you really spend more in retirement, yet still have enough for later years? In some circumstances, with a type of annuity called a single premium immediate fixed annuity, the answer could be yes. By purchasing this type of annuity with a portion of your retirement money, you can provide yourself with a base of guaranteed income—a minimum cash flow you can rely on regardless of how the rest of your portfolio performs.

Could you really spend more in retirement, yet still have enough for later years? In some circumstances, with a type of annuity called a single premium immediate fixed annuity, the answer could be yes. By purchasing this type of annuity with a portion of your retirement money, you can provide yourself with a base of guaranteed income—a minimum cash flow you can rely on regardless of how the rest of your portfolio performs.

Here's a hypothetical example of an annuity in action

Larry's ready to retire, but he's short of his goal. Larry has $1 million in retirement savings and wants to withdraw $44,000 from his portfolio in his first year of retirement. The problem is, that's a first-year withdrawal rate of 4.4%—well above the 4% withdrawal target suggested for funding a 30-year retirement with a 90% level of confidence.

He purchases an annuity. Rather than reduce his standard of living by roughly $333 per month or work part-time, Larry uses $300,000 of his retirement money to purchase an immediate fixed annuity with a lifetime payout. Given current interest rates and mortality assumptions, Larry might expect to receive about $24,000 per year for the rest of his life.*

He meets his target. Now Larry only needs to make a first-year withdrawal of $20,000 ($20,000 withdrawal + $24,000 annuity = $44,000 goal) from his remaining $700,000 portfolio. Now his withdrawal rate is just 2.9% ($700,000 ÷ $20,000 = 2.9%), which is comfortably below the normal 4% target.

By exchanging a portion of his portfolio assets for the promise of lifetime cash flow, Larry can effectively withdraw 4.4% of his pre-annuity portfolio in year one—more cash than the general 4% target provides—and still be 90% confident he can maintain his desired lifestyle for 30 years.

He adjusts for inflation. The $24,000 from the annuity in this example stays flat for the rest of Larry's life—it never gets a cost of living adjustment. Every year, Larry will need to withdraw a little more from his portfolio to compensate for inflation, so his first-year withdrawal rate needs to be lower than the normal 4% guideline—the idea being to withdraw a little less from the portfolio now so that there's potentially more later, when it's needed. In Larry's case, he looks to be in good shape. His starting withdrawal rate of just 2.9% leaves room for his portfolio to do some heavier lifting later.

There are a number of different types of annuities. In the case of a single premium immediate fixed annuity:

  • "Single premium" means you pay for the annuity with a lump sum.
  • "Immediate" means the annuity starts kicking out payments right away.
  • And "fixed" means your payments remain the same, regardless of prevailing interest rates.

Of course, if you've managed to save a huge portfolio relative to your retirement spending needs, you may not need to worry much about protecting your cash flows from market and interest-rate fluctuations. Or, if you've saved little to nothing, an immediate fixed annuity may not be a viable option.

But if you're somewhere in the middle, a low-cost immediate fixed annuity might be an appropriate solution.

Actuarial assumptions and the annuity options you choose, such as inflation protection, will affect annuity pricing. Importantly, all else being equal, pricing for immediate fixed annuities is very sensitive to current interest rates. Your income would likely go up if you could lock in your annuity payment at a time when interest rates are higher. Conversely, during a period of lower interest rates, you would get a smaller income stream from the same lump sum. Interest-rate rule of thumb.

If you think an immediate fixed annuity makes sense for you, you'll want to compare the annuity payments offered by a variety of highly rated annuity providers for the same lump-sum investment—or conversely, find out how big the lump sum needs to be to generate your desired level of monthly income. Just as four house painters may give four different prices for the same project, different insurance companies may give you different quotes for the same annuity, reflecting the underlying costs and fees associated with each company's offering. The guarantee of income for life depends on the issuing insurance company's ability to pay claims, so be sure to choose a financially strong company.

Most immediate fixed annuities offer additional features. All else being equal, adding extra features will reduce the monthly annuity payout for the same initial lump sum (or require a larger lump sum for the same payout). You may find these additional features worth the costs, depending on your needs and objectives.

Three common annuity features:

  • Inflation protection—Your annual payout increases to help keep up with inflation.
  • Single life with period certain—You receive a guarantee that your beneficiaries will continue to receive payments until the end of an agreed-upon period, even if you die during that period.
  • Joint survivor benefits—You accept a lower payment based on joint life expectancy, in exchange for the promise of continued payouts to the surviving joint party.


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