Alternatives To An Immediate Annuity

Look at all your options before you buy an immediate annuity.

An immediate annuity can be a good solution if you want to know you won't outlive your money. Once you buy an immediate annuity, however, you can no longer access your principal. That means you may not want to put all your money into this type of product.

Explore alternatives before making a final decision. The best solution for retirement is usually to build a combination of income producing investments by using an immediate annuity along with one or more of the choices below.

Variable annuity with a guaranteed minimum withdrawal benefit rider

Stacks of coins, like annuity payments.
Annuity riders can provide guaranteed income, but they aren't free. Stella

There are plenty of ways to create retirement income, but only a few of them come with guarantees. One option for income you can't outlive is a guaranteed income rider which is an additional feature that can be added on to a variable annuity or equity index annuity. For an additional annual fee, the insurance company will guaranteed an amount you can withdraw for life at some point in the future. The terms of the guarantee are spelled out in the annuity contract. Unfortunately, you have to know what you are looking for and weed out the options with super high fees and additional bells and whistles (which cost more) that you’ll never use.

Retirement income funds

Piggy bank on top of a pile of money.
Retirement income funds provide monthly checks, but the returns are not guaranteed. Stella

If you're not sure about how to withdraw money from your mutual funds, consider a retirement income fund. They are actively managed to be able to deliver regular retirement income. They provide a solid, all in one investment management solution, and offer more flexibility (but less guarantees) than annuities. One option; put a portion of your money in an immediate annuity for the guaranteed income, and a portion in a retirement income fund to provide you with more flexibility in the future. The key to making the money last will be to only spend the monthly income the fund sends you - and not dip into the principal.

Specified withdrawals from a total return portfolio

Calculator and graphs used to create a withdrawal plan.
Having a withdrawal plan in place can save you from running out of money. menonsstocks

When properly managed, a portfolio of index mutual funds can be structured to pay out consistent income designed to last over your life expectancy. For this strategy to work you have to follow a set of withdrawal rules; guidelines that tell you how much income you can take so you don’t run out. This strategy does not have the guarantees that an immediate annuity has, but you have the potential for an increase in income, and you retain access to your principal. Of course, if the investments perform poorly, you could experience a decrease in income. 

Laddered bonds

Bonds that mature at different times.
A bond ladder may be something to consider. Here is how they work. George Diebold

If you want minimal risk, you might take a portion of your portfolio and buy bonds with different maturity dates so that one bond matures each year for the next ten years. This is called building a bond ladder or income ladder. As each bond matures it would meet your cash flow needs. You can use CDs as well as bonds. As you spend one year's worth, you sell off some of your stock portfolio to buy the next bond. Or, if you have enough savings, you can build a thirty year bond ladder. This strategy may not provide as much income as an immediate annuity, but you retain access to your principal.