How to Build Your Own Pension With an Income Annuity

How to Build Your Own Pension

If you’re like most people heading into retirement, you probably won’t have the luxury of a traditional pension. Employers just don’t offer them like they used to. Social Security helps, but for many, there is a gap between social security income and fixed expenditures.

So the big question becomes: how can you turn a portion of your portfolio into a predictable income stream that lasts for life?

That’s where income annuities come in. They have been one of the most reliable ways to create your own pension, giving you a paycheck you can’t outlive.

What Exactly Is an Income Annuity?

Think of an income annuity as a personal pension you buy for yourself. You give an insurance company a lump sum of money, and in return, they send you a guaranteed paycheck, either right away or at a future date you choose.

There are two main types: immediate income annuities in which income can start immediately and deferred income annuities in which income payments begin at a later time, anywhere from 2-20 years later. The longer you wait to start receiving income, the larger those monthly checks can be. Why is that? Because every year you delay turning the income switch on, your income base is growing at a contractual fixed rate, similar to how delaying social security works. However unlike social security, the deferral rates are very attractive. Some deferred annuities offer a 15% increase to the benefit base every year that income is delayed.

What makes income annuities stand out is their simplicity. You know exactly how much you’ll get each month, and for how long. In most cases, that’s for the rest of your life. Some people also choose to cover a spouse or add features like inflation protection or guaranteed payout periods to leave something behind if they pass away early.

How Much Income Can You Expect?

Your monthly income depends on a few key factors. Your age, gender, how much you invest, and current interest rates. For example, a 65 year old man who puts $100,000 into an immediate annuity would receive around $650 per month for life. Lets break that down. If the man in this example happened to have lived to 95 years old, he would have received a total of roughly $232,500 in income payments from age 65 to 95.

If the same gentleman in the previous example choose to fund a deferred annuity with $100,000 instead and turned on the income switch ten years later, the monthly payouts would look different. He would receive around $1,312 per month starting at age 75. If he happened to have lived until 95, he would have received roughly $330,645 in income payments from age 75 to 95.

However, It’s not just about how much you get, it’s about the certainty of that income. That’s what makes these contracts powerful. No guessing. No market risk. Just consistent, dependable money every month.

Why Would You Use an Income Annuity?

Most people buy annuities to cover the non-negotiable parts of their budget: housing, utilities, food, and healthcare. If your Social Security check doesn’t fully cover those costs, an income annuity can fill the gap. By covering essential expenses with guaranteed income via social security and annuity income, your other assets can appreciate even more! Instead of being forced to sell stock or another highly appreciated asset to cover the mortgage bill, those assets can continue to grow and be used for other non essential expenses. Like a vacation or whatever you may enjoy recreationally.

It’s also a great way to eliminate some of the stress around managing investments in retirement. You don’t have to worry about the market dropping right before you withdraw money. You don’t have to sell stocks in a downturn. The income shows up whether the market is up, down, or sideways.

How to Get Started

The first step is to figure out how much monthly income you actually need. Start with your basic expenses, subtract what you’re already getting from Social Security or pensions, and see what kind of gap you have. Also take into consideration how those expenses may increase in cost due to inflation.

Next, decide how much of your retirement savings you feel comfortable allocating toward creating a guaranteed income stream. It's not recommended to go all in . Many people allocate just 20% to 40% of their retirement nest egg towards annuities and keep the rest invested for flexibility and growth.

Then it’s time to shop around. Annuity payouts vary by company, and so do the features. Some offer higher payouts, stronger credit ratings, or better rider options. Make sure you’re working with a financial professional who can help you compare your options, and make sense of the fine print.

Is This the Right Fit for You?

Income annuities aren’t for everyone. But if you’re looking for guaranteed income, protection from market volatility, and a simple way to cover your monthly needs in retirement, they can be a smart addition to your retirement income plan.

The key to a successful income plan is balance. Balance between safety, predictability, growth, and tax efficiency.

Click the image to watch a brief video to learn more.

Final Thoughts

While annuities can seem confusing at first, the truth is they’re one of the most straightforward ways to buy peace of mind. You trade a lump sum for a paycheck you can count on. Simple. Reliable. Secure.

If you’re getting close to retirement, or already there and you want to take the guesswork out of your income plan, it might be time to explore income annuities.

Schedule a call today to learn more about annuities and how they may compliment your income plan.