How to Compare Retirement Income Investments

Higher income or more control? The choices is yours.

Hands reaching toward falling money.
Compare retirement income investments before you reach out and buy the first one you see.. imagedepotpro / Getty Images

Before you make a retirement income investment, compare the investment to other alternatives so you can best understand the pros and cons.

For each retirement income investment you are considering, write down the following:

  • Cost per $1,000 of monthly income
  • Length or term of income
  • Pros
  • Cons

See the sample comparison below as an example.

The costs per $1,000 a month of income stated below are real-life examples with pricing as of August 2010, however, as interest rates and market conditions change, costs will change.

Be sure to do your own comparison at the time you are looking.

Goal: to generate $1,000 per month of consistent retirement income in addition to social security.

Option 1: Immediate Annuity

Cost per $1,000/month of income:

Single life, male age 65

  • Life only: $159,835
  • Life with 20 year term certain: $161,290

Joint life, both age 65

  • Joint lives: $197,023
  • Joint lives with 20 year term certain: $201,812

Term

  • Specified above.

Pros

  • Immediate annuities guarantee income for life. You cannot outlive your money.

Cons

  • Purchasing an immediate annuity is generally an irreversible decision. You cannot change your mind and get back out of the investment.
  • If you buy a life-only annuity, and die quickly, your remaining funds do not pass along to heirs. Choosing a term-certain payout can minimize this risk.

Learn more: Everything You Need To Know About Immediate Annuities

Option 2: Variable Annuity With Lifetime Income Rider

Cost per $1,000/month of income:

  • $240,000 provided insurance company offers a 5% guaranteed withdrawal starting at age 65.

Term

  • 5% withdrawal of initial deposit amount is guaranteed for life.

Pros

  • Your income can rise if the underlying investment portfolio does well.
  • Your initial income amount is guaranteed for life. You cannot outlive your money.
  • You have access to your principal along the way, although if you take excess withdrawals it will reduce the amount of your future guaranteed income.
  • Any remaining funds are passed along to heirs upon your death.

Cons

  • Your guarantee is only as good as the financial strength of the insurance company behind it, although in the event of an insurance company failure, each state has a state guaranty association that offers an additional layer of protection.
  • Many variable annuity products with guaranteed income features have fees that are so high that it is unlikely you will ever get more than the guaranteed income amount.

Learn more: Guaranteed Withdrawals and Lifetime Income Riders

Option 3: Retirement Income Fund

Cost per $1,000/month of income:

  • $240,000 - $300,000, depending on payout rate of the fund.

Term

  • There is no set term on most retirement income funds. The fund manager will adjust the withdrawals up or down as necessary depending on market conditions.

Pros

  • Professional investment management at a low cost for the purpose of producing reliable retirement income.
  • Your income can rise if the underlying investment portfolio does well.
  • You can access principal as needed.
  • Any remaining funds are passed along to heirs.

Cons

  • Income amount and principal will vary with market conditions.
  • You run the risk of running out of money if you spend too much and the investments do not perform well.

Learn more: Retirement Income Funds – Worth a Look

Option 4: Self-managed or advisor-managed investments

Cost per $1,000/month of income:

  • $240,000 - $300,000 of capital per $1,000/month income assuming a 4 - 5% withdrawal rate.

Term

  • There is not a set term. It is up to you to manage your withdrawals so you do not run out of money.

Pros

  • Your income can rise if the underlying investment portfolio does well.
  • You and your advisor have complete control and the flexibility to change investments as needed.
  • You can access principal as needed, and any remaining funds are passed along to heirs.

Cons

  • Your income and principal will vary with market conditions.
  • You run the risk of running out of money if you spend too much and the investments do not perform well.

Learn more: Withdrawal Rate Strategies for Creating Retirement Income From a Portfolio

Summary Of Retirement Income Investment Comparison

As you compare the retirement income investments above, notice that the cost to guarantee a level income, such with an immediate annuity, is slightly less than the other alternatives. This is because each income payment is composed of both principal and interest.

As you move into choosing retirement income investments that allow the possibility of a rising income, such as with the variable annuities with the guaranteed withdrawal rider, a retirement income fund, or a self-managed portfolio, the cost is higher because you need a little more principal to start with to give you the best odds of income that lasts. With these options you have the potential for higher income, but also additional risk.

The good news: you can mix and match retirement income choices to get a blend of guaranteed income and the potential for a rising income too.

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