One way to create a steady flow of income in retirement beyond your federal annuity is to buy an immediate annuity, also known as a “payout” or “income” annuity. To do so, you make one upfront payment to the provider, which guarantees a payout every month for life.
This also has the effect of taking control of that money out of your hands, since the provider will then be investing it. This could be a plus, if you are wary of the risks of investment losses through personal investing after retirement in anything but guaranteed fixed-income vehicles such as government bonds or CDs, or a minus, if you like investing and still have some tolerance for risk.
At age 65, for example, a man might invest $50,000 in an immediate annuity. If this annuity covers only his life, he might receive about $325 per month ($3,900 a year) as long as he lives. A 65-year-old woman, with a longer life expectancy, will receive less per month.
Moreover, part of your cash flow from the annuity will be tax-free. The payout may be based on an assumption that for example a 65-year-old man has a life expectancy of 21 years.
With a $50,000 immediate annuity, about 1/21 of every payment would be a tax-free return of capital until $50,000 has been returned: Each year, then, about $2,381 will be untaxed, in this example, and only $1,519 subject to income tax each year. If he outlives his life expectancy, all ongoing annuity payments will be fully taxed.
It’s possible to buy an annuity that will cover another person or last for a minimum time period, but such annuities will have lower monthly payouts.
Note: This is also one of the options for withdrawing money from the TSP, although it is the least-use of those options.