In the old days, many people looked forward to pension income in retirement, but few private-sector companies offer pensions any more. Thus, most of us need to rely on ourselves more than ever to provide for our retirements.
There's a good chance you're not an annuitant with guaranteed pension income coming to you. If that's true, and you're wishing you could enjoy a fixed income stream in retirement, look into annuities. Investing in certain types of annuities is a lot like buying yourself a pension. It will send checks regularly your way -- for the duration of the contract or the duration of your life.
Meet the fixed annuity
Annuities are essentially contracts with insurance companies. Typically, you'll hand over a significant sum and receive regular payments immediately or in the future for the duration of the contract. Many contracts offer payments until the end of your life -- or, if you want, for until both you and your spouse have died.
There are many different kinds of annuities: immediate vs. deferred (paying you immediately vs. starting at some point when you're older), fixed vs. variable (certain payouts vs. payouts tied to the performance of the market or part of the market), lifetime vs. fixed period (paying until death or paying for a certain span of time), and so on. Some annuities, such as indexed annuities and many variable annuities, are problematic and unsuitable for many people, charging steep fees and/or carrying restrictive terms. Immediate or deferred fixed annuities, though, are smart options for many people who are in or approaching retirement.
Fixed annuities come in two flavors, immediate and deferred. When you're considering a fixed annuity, be sure to be clear on the distinction: Fixed annuities offer fixed payments (ones largely determined ahead of time, when you buy the annuity) that can start immediately (for immediate annuities) or in the future (for deferred annuities). Deferred fixed annuities offer a guaranteed rate of return, but they don't offer specific fixed monthly payments for life until you choose to annuitize the contract.
The income stream a fixed annuity can offer
If you're now intrigued, you're probably wondering just how much income you might be able to get with a fixed annuity. Well, the deals you're offered when annuity shopping largely depend on prevailing interest rates. We're in a period of low rates now, so you won't be offered as much you might some years from now, but here are some rough examples:
- A 70-year-old man who spends $100,000 may get an immediate fixed annuity paying about $600 per month, or $7,200 per year. A $300,000 purchase would generate nearly $22,000 annually.
- A 70-year-old woman who spends $100,000 may get an immediate fixed annuity paying about $550 per month, or $6,600 per year. (Women can generally expect lower payouts -- because they tend to live longer than men.)
- A 70-year-old couple might get $1,000 per month via a fixed immediate annuity for as long as either is alive for $200,000.
- A 70-year-old man who spends $100,000 on a deferred fixed annuity that will start paying when he turns 75 for the duration of the contract can expect around $900 per month. That's quite a bit more because the insurance company can invest the premium for a few years and will be paying for fewer years, too (on average).
Those kinds of income streams can make a big difference to retirees -- and the fact that they're almost guaranteed is another big plus. Annuities can help annuitants sleep better at night, as they ease the common retiree fear of running out of money.
Guaranteed -- almost
Annuity income is "almost" guaranteed because it's only as reliable as the insurance company that sells it. Thus, seek out the best-rated insurers and perhaps divide your investment money between a few of them. If you were going to spend $300,000 on annuities, you might buy a $100,000 contract from three different highly rated insurers.
Having an income stream that's close to guaranteed is a lot different from having it generated from stocks that could fall in value, even just temporarily, at an inopportune time or from tenants in rental properties who may up and leave you without tenants for a while. It's also valuable because as we age, we often become less interested in and less adept at making financial decisions. An annuitant can just sit back and collect annuity checks each month without doing any further work.
Many of us would do well to at least consider a fixed annuity. Don't leave your retirement up to chance or up to Social Security. The average Social Security benefit, after all, was recently $1,347 per month, or about $16,000 per year. (The maximum was recently $2,639 -- or about $32,000 for the whole year.) If that doesn't seem like enough to live off to you, you'll need to be planning for other income streams.