Retirees who watched in horror as their account balances plunged along with the stock market now face a new challenge: how to generate enough income to pay their bills.
There is, however, an incredible way to stretch your income and you can still be assured you won't outlive your money. According to a study by the University of Pennsylvania's Wharton Financial Institutions Center found that by purchasing an immediate annuity, you could create a stream of secure lifetime income for 25% to 40% less than it would take to generate the same income from a traditional portfolio of stocks, bonds and cash using the 4% withdrawal rule. (That's because with an annuity, you're tapping both your principal and your earnings as well as pooling your risk with other annuity owners.)
Say you're a 65-year-old man with a $1-million nest egg that has shrunk to $700,000. If you use half of your money to buy an immediate annuity, you would receive nearly $29,000 a year in payouts. (A woman would get slightly less because of her longer life expectancy.)
With the remaining $350,000, you could continue to invest in a diversified portfolio of stocks, bonds and cash, and withdraw 4% a year. That would produce another $14,000 annually. Together with the annuity payouts, your retirement income would total about $43,000 a year -- $3,000 more than under the original 4% withdrawal scenario, even though your portfolio is now worth 30% less.
Here's How it Works
With an immediate annuity, you give up control of the money. And although you get the maximum monthly income with a single-life annuity, it stops paying out when you die. If you die prematurely, you forfeit a chunk of your initial investment (which is then returned to the investment pool to pay the benefits of other annuity holders).
Most couples choose a joint annuity that continues to pay out as long as either of them is alive. Although the annual payout is smaller than the payout from a single-life annuity, it ensures continued income for the surviving spouse. And if you're concerned that you may both die before you have recovered your investment, you can choose an annuity that promises to refund any unused premium or to continue to pay out to your heirs for a certain number of years. However, each contingency benefit reduces the amount of your monthly check (see the box below).
HOW MUCH YOU CAN EXPECT FROM A $350,000 ANNUITY
Below is an estimate of how much monthly income you would receive for the rest of your life, depending on your age and gender, based on a $350,000 investment in an immediate fixed-rate annuity. Additional options include continuing payments to a beneficiary for up to 20 years if you die before then; refunding any unused premium to your beneficiary if you die before receiving the full amount of your investment; or paying 100% of your benefit to a surviving spouse (the example below assumes you and your spouse are the same age).
AGE LIFE ONLY 20-YEAR REFUND OF 100% TO
(MALE) ONLY PAYOUT PREMIUM SURVIVOR
65 $2,394 $2,088 $2,264 $1,964
70 $2,714 $2,151 $2,494 $2,201
75 $3,183 $2,191 $2,797 $2,487
AGE LIFE ONLY 20-YEAR REFUND OF 100% TO
(FEMALE) ONLY PAYOUT PREMIUM SURVIVOR
70 $2,497 $2,138 $2,397 $2,201
75 $2,883 $2,181 $2,624 $2,487
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