Boost Your Income With An Annuity

You may be able to get more from your portfolio with an annuity, an insurance contract that guarantees a certain yearly income for the rest of your life.

Many offer payouts that are, initially at least, higher than what you'd get with the 4% rule. Plus the annuity won't run out. (Even so, you shouldn't annuitize all your money -- you want to have savings that can grow and be easily tapped for emergencies.)

Here are some of your annuity options if you want an income stream now:

Immediate fixed

Initial income for 65-year-old man: 7% of amount invested; payment does not increase.

How it works: You turn over a lump sum and in return receive a fixed monthly check for as long as you live. The amount depends largely on your age and interest rates. But it's generally the most lifetime income you can safely get. Insurers essentially transfer money from annuity owners who die early to those who live longer.

The drawbacks: Payments don't rise with inflation, so purchasing power declines. Also, you typically turn over the cash to the insurer and can't pass it on to heirs, so if you die soon after buying, you'll have shelled out a lot for few payments.

Immediate inflation-adjusted

Initial income for 65-year-old man: 4.8% of amount invested; adjusts for inflation every year thereafter.

How it works: Similar to a fixed immediate annuity, except your payments increase annually in line with the consumer price index, so your purchasing power is protected. With 3% annual inflation, the annuity above would pay $4,800 the first year, $6,450 in 10 years, $8,670 in 20, and $11,650 in 30 years.

Do you need an immediate annuity?

The drawbacks: Because the insurance company will probably have to make increasing payments, the initial payment is much lower than that of the immediate fixed annuity. Here, too, you typically sacrifice access to your cash, and your heirs do not get any of the money once you die.

Variable with guaranteed withdrawal

Initial income for 65-year-old man: 5% guaranteed, amount can rise if investments appreciate significantly.

How it works: You divvy your money among mutual-fund-like stock and bond accounts and are assured a minimum income, which has the potential to rise if your investments do well. Unlike the other options, you can dip into the account; and when you die, the account value passes to your heirs.

The drawbacks: High fees (often 3% or more a year) combined with your drawdown mean that for your payment to keep up with 3% inflation, you'd need annual returns before expenses of roughly 11%. Also, taking out more than the guaranteed amount reduces future guaranteed income.

Notes: Immediate annuities assume lifetime income with no payments to beneficiaries.