Those who don’t have a traditional pension — and that includes most of us — are frequently envious of those who do. What could be better than a guaranteed paycheck that lasts as long as you live and is unaffected by the vicissitudes of the stock market?
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There’s another way: Create your own pension with an immediate annuity. Unlike the complex (and usually high-cost) indexed annuities that are sold at free lunches and dinners, immediate annuities (sometimes known as single premium immediate annuities, or SPIAs) are straightforward: You give an insurance company a lump sum and, in return, receive a monthly check, usually for life.
A lot of policymakers and retirement experts believe annuities could go a long way toward improving retirement security in the U.S. But with immediate annuities, security comes at a cost: Once you buy one, you usually can’t get your money back. (Some insurance companies allow you to make a one-time cash withdrawal to cover a financial emergency, such as a large medical bill.) But investing some of your savings in an immediate annuity could help you sleep at night, particularly if you’re worried about a market downturn. If your monthly payout covers your expenses, you’ll have more flexibility to ride out a bear market because you won’t have to tap your investment portfolio to pay the bills.
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What to look for. If you’re interested in buying an annuity, start by tabulating your cost of living. Break down your expenses into mandatory and discretionary categories, says Randy Bruns, a certified financial planner in Downers Grove, Ill. (If you like to live large, you may want to create a third category for luxury expenses.) Once you’ve completed that exercise, you can buy an annuity that, along with Social Security benefits, will cover your basic expenses, such as groceries, your mortgage, utilities and property taxes.
Next, go to www.immediateannuities.com to get an idea of how much you’ll need to invest to generate that amount of income. For example, if you’re a 65-year-old man and need $1,500 a month to keep the lights on and food in the fridge, you’ll need to invest about $266,000 for a single-premium lifetime annuity. If your wife is also 65 and you want an annuity that will continue to pay as long as one spouse is alive, you’ll need a joint-and-survivor annuity. To generate $1,500 a month, you’ll need to invest about $316,000.