Retirement Income for Life

I’d like to buy an immediate annuity that provides $1,700 in income per month for life. Together with my monthly Social Security benefits, that should be enough to cover my regular expenses in retirement. How much will I need to invest? I am 65 years old.

Annuity payout rates are determined by your age at time of purchase and prevailing interest rates. Right now, a 65-year-old man would have to invest about $268,000 in an immediate annuity to provide $1,700 per month for the rest of his life. A 65-year-old woman, because of her longer life expectancy, would have to pay about $288,000 for the same monthly payout. A 65-year-old couple would have to pay about $317,000 for an annuity that continues to pay out $1,700 per month for as long as either one of them lives. You can look up the best annuity quotes from top companies at ImmediateAnnuities.com, which shows how much you’d need to invest to provide a certain monthly payout. You can also use the calculator on the site to see how a particular lump sum would translate into a monthly income stream. The older you are, the higher the payouts.

With a fixed immediate annuity, payouts remain level for life, so they will lose purchasing power to inflation over time. Several insurers offer immediate annuities that increase their payouts each year, either based on the consumer price index or by a fixed inflation amount, such as 2% or 3% per year. However, the initial payouts tend to start at about 25% to 30% less than fixed-payout annuities that cost the same. But if you live beyond your life expectancy, you’ll come out ahead with an inflation-adjusted annuity.

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For example, a 65-year-old man who invests $100,000 in a New York Life immediate annuity without an inflation adjustment could get $6,930 a year for the rest of his life. Or he could buy an annuity with a 3% annual increase, which would start with an annual payout of $5,168 at age 65, growing to $6,743 by age 75, $7,818 by 80 and $9,063 by age 85.

For more information about immediate annuities, see Lock In Your Retirement Income.

As the "Ask Kim" columnist for Kiplinger's Personal Finance, Lankford receives hundreds of personal finance questions from readers every month. She is the author of Rescue Your Financial Life (McGraw-Hill, 2003), The Insurance Maze: How You Can Save Money on Insurance -- and Still Get the Coverage You Need (Kaplan, 2006), Kiplinger's Ask Kim for Money Smart Solutions (Kaplan, 2007) and The Kiplinger/BBB Personal Finance Guide for Military Families. She is frequently featured as a financial expert on television and radio, including NBC's Today Show, CNN, CNBC and National Public Radio.