As life expectancies increase, some people fear running out of money. If so, an immediate annuity may help.
Suppose, for example, you retire at age 65 with a $500,000 investment portfolio. You might put, say, $100,000 into an immediate annuity, thus guaranteeing a lifelong stream of income for yourself and, perhaps, your spouse. The other $400,000 could remain invested, with a tilt towards equities for growth potential and inflation protection.
At current interest rates, that $100,000 immediate annuity would pay around $8,000 per year, indefinitely, which would supplement your pension and Social Security benefits. A recent paper produced by the investment firm TIAA-CREF found that such a strategy would lessen a retiree’s chances of running out of money. In essence, buying an immediate annuity pools your assets with other investors and reduces longevity risk.