It's certainly a quandary for many people: You save up as much money as you can for your retirement, but you aren't going to get any pension income, and Social Security isn't going to deliver nearly as much as you need to live on -- so you're nervous. Will your savings be enough? Will the stock (or bond) market crash at a bad time, limiting how much you can or want to withdraw in some years? What's a person to do?
One strategy is to park a significant portion of your money in solid dividend-paying stocks. That way, even if the market heads south and stocks prices slump, you can still collect the dividend income. Companies rarely reduce or eliminate dividends, so healthy, growing companies are likely to keep paying, and even increasing, their dividends over time. A depressed stock price won't matter too much as long as you're planning on hanging on for many more years. (Bonds can deliver solid income, too, but these days their interest rates are generally rather low.)
That's a good strategy, but it's not foolproof, because even the most solid-seeming companies can have their fortunes change. Once-reliable dividends can be reduced or discontinued.
Hooray for immediate annuities
Here's a strategy that's better in several ways: immediate annuities. You're right to be wary of variable annuities, because they're often problematic, due to factors such as steep fees and/or restrictive terms. Immediate annuities are different, though.
With an immediate annuity, you hand over a big chunk of money to an insurance company in return for a monthly check ... for the rest of your life! See the appeal? It's like buying your own pension. It's not a cheap option, but it offers guaranteed income (as long as the insurance company remains in business). To get a sense of how much you might get from an immediate annuity, know that a 65-year-old man in Colorado could spend $100,000 for about $540 per month for the rest of his life. If he wanted the payments to increase by 2% per year to better keep up with inflation (which has averaged about 3% annually over long periods), it would fall to about $440 per month.
That's a general idea. Women would receive less because they generally live a little longer than men. And various options can make the payout higher or lower, such as your age when you buy, if you want the payments to start now or later, and if you get a joint annuity, where a surviving spouse collects until he or she dies. Even your location makes a difference.
If $400 or $500 doesn't seem like much, remember that a $300,000 investment in annuities would make that monthly check more like $1,200 to $1,500, or $14,400 to $18,000 per year. Add that to a Social Security check in that same neighborhood, and you're looking at $29,000 to $36,000 per year in guaranteed income.
More to know
Here are some other important considerations.
Annuities aren't protected by an agency such as the Federal Deposit Insurance Corporation, so a failed insurance company can wipe out that guaranteed income. Thus, seek out the highest-rated companies and perhaps divide your annuity money between several companies.
The payments that you sign up for today are lower than others have received at other times due to our current environment of extremely low interest rates. If you delay buying, rates are likely to rise and so will payouts. While it's often best to buy long-term care insurance before you get too old (if you're going to buy it), it's best to put off buying an immediate annuity -- unless you expect interest rates to fall. In this environment, you might "ladder" your purchases, buying a third of the annuity income you want now, and another third in a few years when rates are likely to be higher, and the last third even later.
You might want to buy a "deferred" annuity, also referred to as "longevity insurance," soon, though. It's an annuity that begins payments when you're older, such as in 10 or 15 years. If you're pretty sure that your nest egg will last you from retirement at 65 until you're 80, you might buy longevity insurance now that begins paying you at age 80. Thus, you'll never run out of money and the annuity will cost far less because you're buying it early and it will cost the insurance company less, too. Or, if you're still many years from retirement, you can buy a policy now that begins paying when you expect to retire.
Remember, too, that once you buy an immediate annuity, the money is gone and you can't spend it on anything else. You may end up leaving less to your heirs than if you'd kept the money in dividend-paying stocks -- though some immediate annuities can include provisions leaving money to heirs in certain circumstances.
Still, there's a lot to like about immediate annuities, such as the fact that they offer a specific income stream you can count on. As we get older and are less able or willing to keep up with our investments, the arrival of regular checks can be even more valued.