Immediate Annuities to Build an Increasing Stream of Income

Immediate annuities offer a steady flow of income that can last your lifetime as well as your spouse's lifetime. However, with interest rates low and the rising cost of living, retirees are sometimes afraid to place money into assets that produce a fixed income which might not keep up with their increasing needs. One option would be to purchase several smaller immediate annuities over a period of years.

Say that you are a 65-year old man and are considering putting $600,000 into immediate annuities. With that investment, based on present rates, an annuity company will pay you $3,537 per month for the rest of your life (as of 10/3/11). But let's look at what could happen if you were to make three smaller immediate annuity purchases over 10 years.

At age 65, a $200,000 immediate annuity would pay $1,179 per month. Five years later, at age 70, you could purchase another $200,000 annuity which would provide a $1,336 monthly income (assume no change in immediat annuity rates). Finally, at age 75 the last $200,000 would buy an annuity with an estimated $1568 annuity payment. The total monthly income you could start receiving at age 75 would be $4,083, $546 more than with a single large immediate annuities purchase.

The above example assumes that interest rates remain constant throughout the 10-year period. The higher immediate annuity payments come about because the older you are when you buy an immediate annuity, the lower your life expectancy; therefore the annuity company increases the monthly income. And if interest rates rise, the annuity payment could go up still more since the payouts on new immediate annuities might possibly go up as well. Of course, the opposite could happen if interest rates decline. If interest rates were to go down, new immediate annuity rates could fall and you may have been better off with the one-time large investment.

Of course, by opting for several separate purchases, you get to choose the right time to make an investment in immediate annuities so you can wait until the interest rate environment is most favorable.

There's not a simple solution to assuring that your nest egg will last your lifetime, while at the same time having your income keep pace with the ever increasing cost of living. But a judicious use of immediate annuities which supply a lifetime income an be a cornerstone of a sound retirement plan.