How guaranteed income fits in your portfolio

Having some income that's guaranteed, not subject to market ups and downs, can be an important part of a successful retirement. You may want to consider an insurance product that provides regular payments.

Do you need additional income?

An annuity may be right for you if you:

  • Want a guaranteed income stream you cannot outlive.*
  • Need more income than you may be receiving currently.
  • Can buy an annuity and still have other funds for investing, emergencies, or unanticipated purchases.
  • Aren't sufficiently covered by a traditional defined benefit pension plan.

Resources to help you decide

Use our life expectancy and retirement income calculators to help
you decide whether you need an additional source of retirement

Plan for a long retirement
When can I retire?


Learn more about immediate annuities
Case study: Fred chooses an annuity

Annuities for retirement income

"I want the opportunity to maximize the monthly income I receive from my annuity investment.""I want steady income payments with growth potential and protection from market volatility."
Consider an income annuity »Consider a deferred variable annuity with a lifetime withdrawal benefit »
Can help if you're concerned about outliving your assets.Can help if you're concerned about outliving your assets but want to retain control of your money.
Offers the security of a fixed monthly income.Offers guaranteed withdrawals up to a maximum annual amount. Withdrawals have the potential to increase but will never go down.
Offers payments that are guaranteed for life (or for the term you choose).* They can start as soon as 30 days from the date of purchase or as late as your 85th birthday.Offers withdrawals that are guaranteed to continue for life.* You decide when to start payments and if you want to stop them.

Learn more about annuities for retirement income »

Case study: Fred combines an annuity with portfolio withdrawals

(A hypothetical example)

Fred's a widower. He's done well, and he's been planning to retire at age 70, sell his house in the suburbs, and move to the city. He's healthy and intends to enjoy life—but he doesn't want to be extravagant.

Keeping to a plan

Fred is a good planner: He knows where his income will be coming from in retirement, and he's calculated how much he can afford to spend from his savings each year to avoid depleting them. Fred retires at age 70 with:

Selling his house

Fred sells his house for $500,000 and rents an apartment for $1,500 a month. He now has $1.2 million in total savings, including the cash from selling his house, which he deposits into a money market fund:

Proceeds from the sale of his house$500,000

Buying an annuity

Fred uses $400,000 of his cash—one—third of his total savings–to buy an income annuity, which will pay him about $1,400 per month for the rest of his life, adjusted for inflation. The income is guaranteed by the insurance company that sells the annuity.

Fred chooses two options for his annuity:

Consolidating for convenience

At this point, Fred can count on $3,000 per month in guaranteed, inflation–adjusted, lifetime income (from Social Security and his annuity), and he has $800,000 left in his savings. And for the sake of convenience, Fred decides to consolidate his two retirement accounts into one. He withdraws his total 401(k) balance and rolls it over to his IRA account:

Cash left over in his money market fund after buying the annuity$100,000
Fred's total savings $800,000

Withdrawing from savings

Fred plans to withdraw some money from his savings to supplement the guaranteed income he'll get from Social Security and the annuity. He decides to spend 5% of his total savings—or $40,000—in his first year of retirement, adding $3,333 per month to his spending money ($40,000/12 months = $3,333).

Getting the 'paycheck'

Fred's monthly Social Security and annuity income will be deposited automatically to his bank checking account. Similarly, Fred contacts his fund company to arrange that $3,333 be automatically withdrawn each month from his money market account and transferred to his bank checking account. From these three sources, Fred receives a monthly retirement "paycheck" of $6,333.

Monthly Social Security payment$1,600
Monthly annuity payment$1,400
Monthly withdrawals from savings$3,333
Fred's total monthly income in year 1$6,333

Fred is now set for his first year of retirement. He has enough income to support his lifestyle, and he still has substantial savings. But Fred has a few other things he needs to think about.

Coping with inflation

Fred wants to adjust his withdrawals for inflation, just as his Social Security and annuity payments will be adjusted. This is easy enough to do. In his second year of retirement, he'll check the website of the Department of Labor, Bureau of Labor Statistics, to determine the most recent annual inflation rate—as indicated by the Consumer Price Index (CPI–U)—and increase his withdrawal from his savings accordingly. So, if the inflation rate between year one and year two of his retirement is 2%, Fred may want to spend $40,800 from his savings in year two: $40,000 increased by 2%. The same process could apply in future years.

Year–one withdrawal$40,000
Year–two withdrawal (2% inflation)$40,000 x 1.02 = $40,800
Year–three withdrawal (3% inflation)$40,800 x 1.03 = $42,024

Staying flexible

Fred shouldn't take these annual increases for granted, however. He should keep his eye on the markets and on the balances in his savings and investment accounts. If the markets go through a sustained negative period and the value of his savings falls, Fred should plan to reduce his spending in some years rather than increase them by the inflation rate.

Taking required withdrawals

In the first year of his retirement, Fred has more than enough cash from the sale of his house to cover his $3,333 monthly withdrawals. This means that, for at least one more year, he doesn't have to touch investments in his IRA, permitting them–if the markets are favorable–to continue to grow on a tax–deferred basis.

But starting in the year after Fred turns 70½—which will be his second year of retirement—the IRS requires him to begin taking minimum distributions from certain tax–favored retirement accounts, such as IRAs and 401(k)s, and to pay taxes on those distributions. Fred signs up for the automatic required minimum distribution (RMD) service offered by his IRA provider. Each year the company calculates (and distributes to Fred) the minimum amount he needs to withdraw from his IRA to comply with the law. Fred knows, however, not to confuse his RMDs with his spending plan. Regardless of the amount that the IRS requires Fred to withdraw from his IRA, Fred will discipline his spending. In some years Fred's RMD will exceed his spending plan, so he'll save the excess for the future; in other years Fred's plan may dictate that he withdraw more than the required minimum from his IRA.

Investing for the long term

Fred realizes that the rate at which he'll be spending from his savings (5% in the first year with annual increases for inflation) is somewhat aggressive. That is, he understands that there's some risk over a 20– or 30–year period that he'll run out of money, unless his savings grow at a rate that keeps pace, roughly, with his withdrawals.

That's why he's decided to keep long–term savings, such as his IRA, invested and diversified across the stock and bond markets, a strategy that has the potential to grow his portfolio over time even as he's spending from it. Fred isn't interested in making any radical changes to the way he's been investing over the past decade, which has been approximately 60% in stock funds and 40% in bond funds.

As he ages, he expects to reverse gradually those allocations and get somewhat more conservative—perhaps to 40% stocks and 60% bonds—still keeping enough of a stake in the stock market to capture some of its potential for growth.

Fred will keep his short–term savings—his spending money for the next year or so–in his money market fund, which is low—risk and highly liquid. Each year, in accordance with his spending plan, he'll liquidate some of his long–term savings and shift them to his money market fund. At the same time, he'll check the allocation of his long–term savings and rebalance them if necessary.


© 1995–2015 The Vanguard Group, Inc. All rights reserved. Vanguard Marketing Corporation, Distributor of the Vanguard Funds.
Your use of this site signifies that you accept our terms & conditions of use.
Security  |  Prospectuses  |  Careers  |  Mobile  |  Social media

1.0.0-M20150206-01, 17.950.0-M20141105-01