Annuity, yes or no?

I keep running across comments like:
"Inflation will kill you if you devote a part of your portfolio to an immediate annuity that isn't inflation protected."

>Inflation protected?
Yes. I'm talking about an annuity where you pay umpteen dollars and receive a fixed and constant income for life.

>I'd say that inflation will kill you!
Yeah, that's a common misconception. In fact, if the annuity rate you get is large enough you're better off devoting a part of your money to the annuity ... and investing the balance.

>Huh? Annuity rate?
By that I mean, if you pay $100K for the annuity and get $7.89K annual income (for life), that's an "annuity rate" of 7.89%

>What does "better off" mean?
It means that if you want an annual income of, say $40K (increasing with inflation) and you devote a part of your money to an annuity and it pays you $4.7K each year, then your annual income requirement from your portfolio is reduced by $4.7K.

Note that, even though you may devote some monies to an annuity, your annual income will STILL be $40K (increasing with inflation).
It's just that part of this will come from the annuity.

>But if you buy an annuity, your investment portfolio is reduced too!
True, but ...

>So how do you know whether ...?
Just play with the spreadsheet, here, where random annual returns are generated each time you press F9:

The chart shows the two portfolios over a 40-year period ... depending upon whether or not you buy an annuity.

To download the spreadsheet, Click on the picture or, if that don't hardly work, try a Right-click and Save Link Target.

PS#1: The spreadsheet may change without notice

PS#2: See also annuities