Payments for a lifetime
A reader retiring soon wants the peace of mind of a fixed income. Here's what he should consider.
By Walter Updegrave, MONEY Magazine senior editor

NEW YORK (MONEY) - QUESTION: I plan to retire in three years, and I'd like the peace of mind of steady payments. I have about $550,000 and plan to retire in three years at age 62. Would you suggest I buy an income annuity?

-- William Pincus, Las Vegas, Nevada

ANSWER: An income annuity -- a vehicle that turns a lump sum of cash into guaranteed monthly payments -- can certainly provide peace of mind in retirement. You know that every month, whether the financial markets are going up, down or sideways, you'll get that monthly check.

Indeed, researchers have found that having the assurance of a steady income from a traditional company pension can significantly boost a retiree's feeling of happiness and satisfaction in retirement. (For more on this and other keys to a happy retirement, click here.)

Today, of course, fewer and fewer people have traditional corporate pensions. But buying an income annuity is one way to duplicate that steady monthly income, and the warm and fuzzy feelings that come with it.

How much of your nest egg might you devote to an annuity?

Well, you certainly don't want to use all of your retirement savings to buy an income annuity. In fact, unless you've got lots of other resources, I'd think you wouldn't even want to put half of it into an annuity.

The reason is that once you turn over your cash to an insurer for the annuity, you no longer have access to it. (Yes, some annuities do allow you to get at your money under certain circumstances. But you receive considerably less income.)

So you want to keep a good portion of your savings outside an annuity in regular investments, such as stocks, bonds and mutual funds. This way, part of your savings will continue to grow, and you'll also be able to dip into those assets to meet unexpected expenses and fund occasional splurges.

If you can manage it, it's a good idea to try to cover as much as possible of your fixed retirement expenses -- food, housing costs, etc. -- with Social Security payments and annuity income, and then tap your investments for whatever else you need. This way you'll have a nice cushion in case you need it later in retirement.

Of course, whether you'll be able to manage this will depend on the size of your expenses and the amount you'll receive from Social Security and the income you get from whatever portion of your next egg you put in the annuity.

Run the numbers first

You can get a good idea of how much you'll get in Social Security payments by going to Social Security's benefits calculator. To get an estimate of how much an annuity income might pay, you can go to

Right now, a 62-year old who invests $100,000 in an income annuity, would receive roughly $625 a month for life. Of course, that figure is based on today's interest rates. If rates go down in the next three years before you turn 62, you'll get less. If they go up, you'll get more.

By the way, you can also take a payment arrangement known as a joint-and-survivor or joint lifetime income option that assures that your spouse will continue to receive income if you die first. You will receive a lower payment for this option (recently a husband and wife both 62 investing $100,000 would be guaranteed to receive about $550 a month as long as either one was alive) since the insurer is likely to be making payments for a longer period.

Be sure to compare quotes from several insurers since the amounts different companies may be willing to pay can easily vary by 10 percent or more. You can do this sort of comparison shopping at, but I also recommend that you contact companies like Vanguard and Fidelity that sell their income annuities directly to consumers so you have a few more quotes to throw into the mix.

I realize that all this can seem a bit daunting at first. But if you start doing your research now, you should easily be up to speed and ready to make a good decision three years from now when you hit 62.


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