Ask people what scares them most about retirement, and running out of money usually lands near the top.
Everybody wants a paycheck that never stops.
The insurance industry has a product built for that fear: the annuity. You hand an insurer a chunk of savings, and it promises you a check for life.
Here’s what the brochure leaves out. The usual way to buy one is from a salesperson, and that salesperson gets paid out of your deal.
I worked on Wall Street as an investment advisor for more than a decade. I know how commission pay works, and I know it shapes what gets put in front of you.
That doesn’t make guaranteed income a bad idea. It means you should buy it the smart way. Here are five ways to get a lifetime paycheck where the cost is low, or at least out in the open.
1. Wait to claim Social Security
Before you buy a lifetime paycheck from an insurer, look hard at the one you already own.
If you were born in 1943 or later, Social Security raises your benefit 8% for every year you delay past your full retirement age, according to the Social Security Administration. Those raises stop at 70.
Let’s run the numbers. Say your full retirement age is 67 and your benefit there would be $2,000 a month. Wait until 70, and three years of 8% credits add 24%. That’s $2,480 a month — for the rest of your life.
No salesperson. No surrender charge. And unlike a standard annuity, whose payment usually stays flat, Social Security checks get cost-of-living raises when inflation pushes prices up.
Waiting isn’t right for everybody. Your health and your cash needs matter. But if you can swing it, it’s about the best deal in guaranteed income you’ll find.
Retirement journalist Mary Beth Franklin makes the case in “I Do Not Know Any Other Investment That Can Guarantee Me a 76% Increase in Income Over an 8-Year Period.”
2. Build a TIPS ladder
Treasury Inflation-Protected Securities, or TIPS, are bonds issued by Uncle Sam. Their principal rises with the Consumer Price Index, and because interest is figured on that principal, your interest rises too.
A ladder means buying TIPS that come due in different years — say, one maturing every year from 70 to 85. Each bond that matures becomes that year’s spending money.
When a bond matures, you get the inflation-boosted principal. TIPS sell in $100 steps, and you can buy them directly from the government at TreasuryDirect or through a brokerage account.
Here’s the tradeoff. A ladder stops paying when the last bond matures. If you live to 100, it won’t follow you there the way a lifetime annuity would. The upside: whatever you don’t spend goes to your heirs, not the insurer.
One tax wrinkle. In a regular taxable account, you owe tax on the inflation bump each year, even though you don’t get that money until the bond matures.
I explain that catch in “Clark Howard Says Open Your Social Security Account Now. I’m a CPA — He’s Right, and Here’s the TIPS Tax Catch.” Holding TIPS in an IRA puts off that tax until you withdraw.
3. Buy a plain income annuity, and shop it
If you want a check that lasts exactly as long as you do, the simplest tool is a single premium immediate annuity. You give an insurer a lump sum, and it starts paying you on a schedule you pick, for life.
Big brokerages let you compare several insurers side by side. Fidelity says having a choice matters because no single insurer always pays the best rate, and it offers a Guaranteed Income Estimator for comparing quotes.
Schwab lists immediate annuities from several insurers as well. Check the minimum purchase before you get attached to a quote.
Get more than one quote. Then check each insurer’s financial strength, because a lifetime guarantee is only as solid as the company making it.
And stick with the plain version. Every add-on — riders, bonuses, index formulas — makes it harder to see what you’re paying.
The SEC warns that features on indexed annuities can trim your return just like a fee, even on contracts marketed as “no fee.” That same bulletin says surrender periods typically run six to 10 years, sometimes longer.
Quick thought — most financial “gurus” got rich selling advice, not following it. I’d rather show you what actually works, because I’ve lived it. Sign up for the free Money Talks Newsletter for money advice from someone who takes his own. 10 seconds, no spam.
4. Hire an advisor who can buy commission-free annuities
Here’s something most people never hear: there are annuities sold with no commission at all. They’re built for registered investment advisors, who charge you a fee instead.
Lincoln Financial, for one, rolled out commission-free immediate and deferred income annuities for these advisors in 2019, and it still markets fee-based annuities built for them.
Why does that matter? A fee you pay an advisor shows up on your statement. With a commission product, the seller’s pay is usually built into the contract. The SEC notes, for example, that a variable annuity’s contract fees may go toward paying the person who sold it to you.
If you go this route, ask any advisor, in writing, exactly how they’re paid. Then look them up with the SEC’s free Check Out Your Investment Professional tool. If the titles confuse you, start with “What Does a CFP, CFA, CPA, RIA or IAR Do for Your Money?”
If you don’t have an advisor yet, you can compare financial advisors here. Whoever you talk to, ask how they get paid before you sign anything.
5. Check your 401(k) for a built-in annuity
Some employers now let you turn part of your 401(k) into a lifetime paycheck, right through the plan.
Fidelity, for example, runs a program called Guaranteed Income Direct. Workers in participating 401(k), 403(b) and 457(b) plans can use some or all of their savings to buy an immediate income annuity from an insurer their employer picked.
When it announced the program in 2021, Fidelity said workers would get institutional pricing. That’s the bulk rate a big plan can negotiate, rather than the retail price you’d pay walking in alone.
Not every plan offers this. Call your HR department or plan administrator and ask two questions: Do we have a guaranteed income option, and what does it cost? Ask before you leave the job. Here are “5 Things to Do With Your 401(k) the Week Before You Retire.”
The bottom line
Guaranteed income is worth having. A check that shows up no matter what the stock market does lets you sleep at night. I look at where annuities can hurt you in “Jean Chatzky Says Annuities Deserve a Second Look.”
Just don’t pay retail for peace of mind. Start with Social Security, the best deal on the table. Fill any gap with the cheapest guaranteed income you can find.
And whatever you buy, know exactly who’s getting paid, and how much. If nobody can tell you, that’s your answer.
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