A good way to boost retirement income

6/18/2017, 6 a.m.
Is an annuity is a good way for seniors to increase their income in retirement?--S.N.

— Is an annuity is a good way for seniors to increase their income in retirement?--S.N.

The short answer is yes, an annuity can be a good way to safely get more income out of your retirement nest egg. But that doesn't necessarily mean you should own one.

And even if you think you should, there are number of things you need to keep in mind before you consider buying an annuity, starting with what type makes the most sense for your situation.

For example, I find that the annuities typically peddled by people who sell them for a living -- fixed index annuities and variable annuities -- often come with onerous expenses and lofty fees that can drag down their returns and reduce the size of their payouts.

As if that's not bad enough, such annuities tend to be exceedingly complicated, making it difficult for anyone who's not a financial savant to understand how they work and how they'll perform.

But there's one type of annuity that can deliver the unique benefit only an annuity can offer -- guaranteed income you can't outlive -- but is also relatively easy to comprehend. I'm talking about an immediate annuity. The concept is simple: You hand over a portion of your savings to an insurer and in return receive a fixed monthly payment no matter how long you live and regardless of how the financial markets perform.

Today, for example, a 65-year-old man investing $100,000 in an immediate annuity would get about $550 a month for life, a 65-year-old woman would receive about $525 and a 65-year-old male-female couple would collect about $470 a month as long as either one is still living.

You can see how much you might collect at different ages for different amounts invested by going to an annuity payment calculator.

But, you may ask, couldn't you draw the same monthly amount, if not more, from that hundred grand by forgoing the annuity and just investing the money on your own? The answer: not likely.

The reason is that some annuity owners will die before others, which allows insurers to essentially transfer the payments that would have gone to those who die sooner to those who live longer. And, indeed, insurers factor this transfer of money -- known as "mortality credits" -- into their annuity payout rates. Thus the annuity payment you receive includes not just investment gains and the return of your original principal, but these mortality credits as well.

You can't get mortality credits, or this extra source of income, from other investments; only an annuity that pools money from many investors can generate them. Which means that it's highly unlikely that you could match an annuity's lifetime payments on your own, or even by hiring a pro to invest your money.

You could, of course, try to match or exceed an annuity's payments by taking on more investing risk in an attempt to boost your return. But such a plan could easily backfire. If the market goes into a tailspin, you could suffer big losses and run out of money while you've still got a lot of living to do.