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Making it last
Will an income annuity give me a guaranteed lifetime income?
September 19, 2003: 11:51 AM EDT
By Walter Updegrave, Money Magazine

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NEW YORK (CNN/Money) - I am 50 years old and have $58,166 that I'm thinking of investing in an income annuity. How much guaranteed lifetime income can I get for that amount of money?

-- Henry Larrymore, Columbia, South Carolina

Not much, I'm sorry to say. You would probably get around $325 a month by using your fifty eight grand to buy a "fixed immediate annuity," which is the type of annuity that gives you a guaranteed monthly income for life.

You could get a bit more or a bit less than this sum, depending on which insurance company's annuity you buy. (For quotes from several insurers, click here.

But remember, you're relying on the financial wherewithal of the insurer to be able to make these payments decades into the future. So you probably want to stick with an insurer that gets high financial strength ratings from companies like Standard & Poor's and Moody's Investors Service.

Why so small an amount?

The reason your payment is relatively small is that you've got two things working against you. First, there's your age. In the annuity world, you're a spring chicken. So when an insurer calculates how long they'll have to invest your $58,166 and pay you an income from it, they're figuring they're going to be on the hook for those payments for many, many years.

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Which makes perfect sense when you think about it. Longevity is increasing, medical technology is improving and even 65-year-olds on average are expected to live to 80 to 85 years of age. So the longer the insurer figures it will be shelling out monthly payments to, the smaller those payments are going to be.

The second thing working against you are today's low interest rates. When an insurer sells you a fixed income annuity, it invests your money primarily in bonds. The lower the interest rate those bonds pay, the lower the income the insurer collects, and the less it can pay out to you. It's that simple.

Look at other options

Before you go ahead with your plan, I have a two suggestions. One is to postpone your decision to "annuitize." Once you hand over your money to the insurer in return for the promise of a lifetime income, the decision is pretty much irrevocable. You can't change your mind and get your money back years later. So this isn't something to go into lightly.

Let's say that instead of annuitizing your $58,166, you invest it for 10 more years and earn an annualized return of 8 percent. Ignoring taxes for simplicity's sake, you would have roughly $126,000 in 10 years. That sum would give you a monthly income of $770, perhaps more if interest rates are higher 10 years from now.

And if you can hold off till age 65, your fifty eight large would grow to about $185,000, yielding a $1,240 monthly income. Of course, waiting means you would have to get by on other resources. But you would be giving yourself a larger cushion of security in old age.

My second suggestion is that you also consider a "variable" annuity. With this type of annuity, you can get a lifetime income, except that the amount you receive each month isn't fixed. It fluctuates.

You invest the money in the variable annuity in a portfolio of mutual fund-like "subaccounts," The amount you receive each month then depends on how well those subaccounts or funds perform. True, this means your income stream is more volatile; and it can go down. But if your subaccounts perform well over the long term, your monthly annuity payment will rise over time, doubling, tripling or increasing even more over many years.

Ask the Expert
Walter Updegrave

Generally, I recommend that people looking for a secure retirement income consider both a fixed and a variable income annuity so that they have a better chance of maintaining their standard of living in the face of inflation.

For a more detailed look at how one might use both fixed and variable annuities as part of a retirement income strategy, I suggest you check out "Income For Life," a feature story I wrote in the July 2002 issue of Money. If you subscribe to CNNMoney's premium service or you're a MONEY Magazine or AOL subscriber, you can read the article by clicking here.

And whatever you do, don't put all your money into annuities. You want to have a sufficient pool of assets that you can draw on for emergencies, unexpected expenses and the occasional splurge. A monthly income is nice, but you also want to have a pool of ready assets to draw on when you're faced with one of life's inevitable surprises.

Walter Updegrave is a senior editor at MONEY Magazine and is the author of "Investing for the Financially Challenged." He also answers viewers' questions on CNNfn's Money & Markets at 4:40 PM on Monday afternoons.  Top of page

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