Buying Your Own Annuity

If you purchase an immediate annuity (also known as a payout annuity or an income annuity), you buy a pension from an insurance company. This type of annuity can provide you (and perhaps your spouse) with an income stream you’ll never outlive.

Suppose, for example, you and your spouse are both 66 years old. If you buy an immediate annuity for $200,000, at current interest rates you might receive around $1,100 per month, as long as either is alive. Each monthly payment will be partly tax-free until your $200,000 investment has been returned.

Older buyers will receive more income over their shorter life expectancies. Say you and your spouse are both 76 when you invest $200,000 in an immediate annuity. You could receive nearly $1,450 per month.

Although immediate annuity payments will become fully taxable, if you outlive your life expectancy, they will keep going as long as you live. The same goes for your spouse, if you buy a joint annuity. You should shop around, though, because annuity rates vary from company to company.

To boost sales of these income annuities, some insurers have a “commutation feature” that offers investors a chance to get their money back in a lump-sum. Such a feature may reassure investors who are reluctant to turn over a substantial amount of money in return for a stream of modest payments.

To stimulate sales of immediate variable annuities, some insurers are providing guaranteed minimum returns. At some companies, such annuities have three guarantees to choose among: investors pay more for higher guarantees.

Fixed or variable, most immediate annuities have lifetime payouts. To reduce risk, you can get a period-certain annuity, meaning that the contract will make some ongoing payments to your heirs in case you die during that period. You can choose a period that’s just short of life expectancy, which will not make the payments that much lower than they would be with a lifetime annuity.