Income to Count On

Even if you've beefed up personal savings in recent years, you're probably not ready to retire until you have bought an immediate-fixed annuity, an insurance contract that will pay you a set amount monthly for the rest of your life. With interest rates up, the guaranteed income you can lock in now appears generous.

Why do you need an immediate-fixed annuity? Traditional pensions are disappearing, and Social Security is on wobbly ground. Those two onetime pillars of retirement finance used to give many retirees enough secure monthly income to cover most of their critical living expenses. But now we have 401(k)s, IRAs and other tax-favored savings accounts, with nothing guaranteed. The onus is on you to manage distributions in a way that you will not run out of money.

That's a tall order for most folks. To make it easier, Congress is considering several bills that would cut the tax rate on annuity payments. The hope is that more people would then buy an immediate annuity to replace or supplement eroding income from traditional pensions and Social Security. "If you want the absolute assurance of income for life, there is no alternative," says John Olsen, principal at Olsen Financial Group in St. Louis, Mo.

Income annuities should not be confused with variable annuities. Variable annuities let you save tax deferred through standard mutual funds and may offer certain guarantees (like a minimum return). But they often have high expenses and commissions. Immediate-fixed annuities are simple, low-cost products that let you plunk down a pot of money and get a secure monthly income for life (or some other designated period).

A 65-year-old man who pays $100,000 to Fidelity & Guaranty, in Baltimore, Md., today would lock in guaranteed monthly payments of $692 for life, according to annuityshopper.com That's up from $648 a month just a year ago, reflecting today's higher interest rates and pointing up why now may be a good time to secure this kind of fixed income. If rates move lower, as they probably will with the economy slowing, income annuities bought, say, next year would offer smaller fixed monthly payments.

If you have ample assets or can easily live off your bond, rental or other income or your stock dividends without selling the underlying assets, you may not need an income annuity, which is really just insurance that you will never run out of money. If you don't need it, don't pay for it. If you buy an immediate annuity and die soon after, you will have given an insurance company what could have gone to your heirs.

You can protect against that worst-case outcome. By accepting a lower monthly sum, you get an annuity that guarantees payment to your estate--say, $665 a month for 10 years or $603 for 20 years, in the example above. You can and should buy an income annuity that also builds in inflation increases and continues until the death of a surviving spouse.