I’m 72 and I have a very small pension. I’d like to buy an immediate annuity to supplement my income. How do I figure out how much I should invest in the annuity?
Take Our Quiz: Are Annuities Right for You?
A good way to calculate how much to invest is to add up your regular expenses in retirement, subtract any guaranteed sources of income, such as Social Security and your pension, and buy an immediate annuity that provides enough income to fill in the gaps.
With an immediate annuity, you give an insurance company a lump sum and it promises to pay you a set amount of money every month or year for the rest of your life, starting right away. It can be a good way to convert some of your savings into income you can’t outlive, especially if you don’t have enough money coming in from a pension or Social Security to cover your bills in retirement.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
When you do the calculations, consider all your expenses and sources of income in retirement. For example, if your housing, food, car, insurance and other regular expenses add up to $3,000 per month and you get $1,900 per month in pension and Social Security income plus $300 in rent (after expenses) from an income property, consider getting an immediate annuity that provides $800 per month in lifetime income. If a 72-year-old man invests $120,000 in an immediate annuity that pays out only as long as he lives, he’ll get about $810 in monthly income. If you’d like the income to continue for as long as you and a 72-year-old spouse live, you’d need to invest about $160,000. The older you are when you invest in the immediate annuity, the higher your annual payouts will be. You can run the numbers for your situation at www.immediateannuities.com.
The stability of immediate annuities is both a blessing and a curse. You know exactly how much you’ll get every year for the rest of your life – no matter what happens to the market or interest rates in the future. But payouts for annuities purchased now are based on today’s low interest rates. Also, because your payouts never change, their buying power shrinks over time because of inflation (some insurers offer immediate annuities with inflation-adjusted payouts, but they start with much lower payouts in the beginning).
You don’t want to tie up too much of your retirement savings in an immediate annuity. Most retirees need to continue to invest some money in stocks to earn higher returns that keep up with inflation. And once you’ve handed over your lump sum for an immediate annuity, you can’t tap it, even in an emergency.
For more information about how an annuity fits in your retirement portfolio and how to invest the rest of your retirement savings, see How to Invest After You Retire.
-
Fed Sees Fewer Rate Cuts in 2025: What the Experts Are SayingFederal Reserve The Federal Reserve cut interest rates as expected, but the future path of borrowing costs became more opaque.
-
Jabil Stock Pops After a Beat-And-Raise QuarterJabil stock is higher Wednesday after the electronics firm beat earnings expectations and raised its full-year outlook. Here's what you need to know.
-
No Need to Panic: Social Security Is NOT Running Outsocial security Yes, Social Security is undergoing some changes, including a possible reduction in benefits in the not-too-distant future – but the checks won’t stop coming. Here’s why the program is changing and what to expect.
-
5 Year-End Moves to Help Retirees Trim Their Tax Billtaxes The end of the year is a great time to start thinking about next year's tax bill. Here are some strategies on how to reduce what you will owe Uncle Sam.
-
Worried About Higher Taxes in Retirement? Strategize Now.Tax Breaks With the Tax Cuts and Jobs Act expiring after 2025, it’s a good time to be proactive about taxes. Here are some smart ideas to consider to put a lid on your tax bills in retirement.
-
IRA Tax Planning: Minimizing the RMD Ticking Time Bombrequired minimum distributions (RMDs) Couples with a bit of an age difference have an interesting strategy available to them to reduce taxes on their retirement savings due to required minimum distributions.
-
How the Social Security Earnings Test May Affect Your Retirementsocial security If you start taking Social Security benefits before your full retirement age and decide to continue working, you need to understand how the earnings test works.
-
Waiting for Fixed Annuity Rates to Rise Doesn’t Payannuities If you like the guaranteed rates and tax deferral that fixed annuities offer, but you want to wait because you’re hoping rates will improve, think again. Here’s why keeping too much in cash while you wait puts you behind … and you may never catch up.
-
Turned off by Low CD Rates? Consider a Fixed Annuityannuities CD rates are under 1%, but comparable annuities can pay more than 2% to 3% guaranteed and tax-deferred.
-
6 Tax Strategies for Retirementretirement Taxes are one thing retirees tend to have a little control over, as long as they do some serious planning.
