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?
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.
But with immediate annuities, security comes at a cost: Once you buy one, you usually can’t get your money back.
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.
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.immediate annuities.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.
One downside to immediate annuities is that inflation will erode your monthly payments over time. You can buy an annuity with an inflation rider, either one that increases at a set rate so that your income rises each year by a specific percentage (usually 3 percent) or one that increases (or decreases) each year based on changes in the consumer price index.
The trade-off is that during the first few years, your monthly payouts will be up to 28 percent lower than those from an annuity without the rider. If you’re using the annuity to cover expenses that won’t change much (such as a fixed-rate mortgage), you may be better off skipping this feature in favor of larger payments.
An alternative is to ladder annuities — that is, spread out your annuity purchases over several years.
If interest rates go up, the payments on annuities you purchase in the future will be higher. You’ll be older, too, and that automatically means your payments will increase.