# How can we determine how much income our savings could generate if we purchase an annuity?

I am 62 and my wife is 56. We have almost 1.5 M in retirement investment and 250 K in non retirement investments. I was wondering if we both retire in 6 years and turn all our investment into annuity, how much we would receive per year. WE are now saving at a rate of 60 K per year (retirement and non retirement). Also is there a site where I can compute the answer to annuity questions like this? Sort of an annuity calculator.

• Sep 21 '14 at 23:37
• Depends on mortality rates, inflation, and prevailing interest rates in your country, among other things. Where are you? Sep 22 '14 at 2:23
• I live in the US Sep 22 '14 at 5:00
• With traditional annuities with joint survivorship, all money will go to the insurance company when you both pass, there will be nothing left for heirs. You probably only need a "small" annuity to replace your income and the rest can continue to grow in the market and pass to your heirs. By "small", I mean relative to your portfolio value. Sep 22 '14 at 13:06
• If your retirement money is in Traditional IRAs and Traditional 401ks (which can be rolled over into Traditional IRAs, then you will be getting a pretty substantial amount of money as RMDs. Assuming (1) all retirement money in your name, (2) no contributions from now on, (3) 5% average annual growth, the RMD in 2022 will be almost \$81K, and will increase each year to a peak of \$182K in 2049. (You can withdraw more than the RMD each year if \$81K is too little). With RMDs, the remaining balance in your IRA will dip below \$2M in 2044 or so. So, do rethink whether you want to get an annuity. Sep 23 '14 at 2:09

## 2 Answers

Annuity calculation formulas can be found here. http://en.wikipedia.org/wiki/Annuity_(finance_theory). In addition, as suggested in the comments, there are many sites that have calculators.

Having said that, a simple financial mechanism that is followed by many is to invest a portion of the fund in regular income instruments, for example Govt. or corporate bonds that pay a regular coupon/interest and some in diversified instruments like gold, stock etc. The exact proportion is dependent on may factors, like mortality, inflation, lifestyle, health care requirements, other expenses. The regular income provides the day to day expenses on a monthly/yearly basis, while the other instruments hedge against inflation and provide growth.

Note that it isn't always clear that "turning it all into an annuity" is the right answer. Annuities are essentially insurance policies -- you're paying them a share of your income to guarantee a specific payout. If you outlive the actuarial tables, that may be a win. If the market crashes, that may be a win. But I'm increasingly hearing the advice that staying in investments (albeit in a very conservative position) may pay better longer.

There are tools which will do monte-carlo modelling based on what the market has done in the past. You give them your estimate of how much in today's dollars would be needed to "maintain your lifestyle", and they'll tell you how much savings you need -- and what form you might want to keep those savings in -- to have good odds of being able to live entirely off the earnings and never touch the capital My employer makes such a tool available to us, and in fact Quicken has a simpler version built into it; it's nice that the two agree.