A study by the Wharton School and New York Life Insurance Co. finds that income annuities are cost-effective, low-risk vehicles for guaranteed cash flow. Income annuities, also known as immediate annuities or payout annuities, can provide income for as long as you live; they also can be designed to provide for a surviving spouse.
Suppose, for example, you wanted to retire at age 65 and get $45,000 a year from a portfolio of stocks, bonds, and mutual funds. Most financial advisors would suggest you accumulate $1 million if you want to take such withdrawals over a long retirement. Instead, with around $600,000, a 65-year-old likely can buy an income annuity that will pay $45,000 a year for life. The downside, of course, is that once you buy the annuity the money is no longer yours, and your heirs could end up coming out behind if you die before recouping what you put in.
The study reports that markups on income annuities have come down from 6 percent-10 percent to less than half that range today. Thus, investors can get more cash flow for their dollars. In addition, today’s versions of income annuities offer innovations such as annual inflation adjustments, benefits for heirs, and access to capital in emergencies.
