How it works
Choosing between a single-premium immediate annuity and a bond ladder is choosing between two failure modes: longevity risk and liquidity risk. The annuity converts principal into a guaranteed monthly cheque for life - on illustrative single-life rates near 6.6%, $500,000 pays roughly $2,750 monthly forever, however long forever lasts - but surrenders the principal irrevocably and lets inflation shave its purchasing power every year. The bond ladder keeps ownership: interest-only income near $1,790 monthly at a 4.3% yield while rungs mature, with the full principal returned at the end to spend, bequeath or redeploy - yet it dies with you financially unremarkable if you live long past it, and it must be reinvested repeatedly at unknown future rates. This calculator runs both across your horizon: cumulative income from each stream, the gap between them, the nominal principal surviving under the ladder, and the annuity payment restated in today's dollars after decades of assumed inflation. The honest conclusion most analyses reach is that they are complements, not rivals - annuitize the slice covering non-negotiable expenses, ladder the rest for flexibility and legacy - because each design insures precisely the risk that bankrupts the other. Rates shown are illustrative; real quotes move daily and depend heavily on age and rate environments.
Formula
annuity monthly = lump x payout rate / 12 | ladder monthly = lump x yield / 12 | real payment = payment / (1 + inflation)^years
Tips
- Annuitize essentials only - housing, food, Medicare premiums - and ladder everything discretionary.
- Ladder income depends on reinvestment rates; annuity income never reprices, for better and worse.
- A 25-year horizon at 2.5% inflation cuts a fixed annuity's purchasing power almost in half.
- Joint-life payouts run 8-12% lower than single-life - price your actual household, not a headline rate.
- State guaranty associations cap annuity protection per insurer; large sums should split carriers.
Frequently asked questions
- How much monthly income does a $500,000 annuity pay?
- At an illustrative 6.6% single-life payout rate, about $2,750 per month for life. Actual quotes vary with age (older buyers receive more), sex, whether payments continue to a spouse, and prevailing interest rates - so treat any figure older than this week as stale.
- What is a bond ladder for retirement income?
- Bonds maturing in staggered years - one rung each year or half-year - so principal returns regularly for spending or reinvestment. Interest-only spending on $500,000 at a 4.3% yield generates roughly $1,790 monthly while preserving the corpus, trading guaranteed lifetime income for liquidity, legacy and rate risk.
- Which is better: annuity or bond ladder?
- They insure opposite risks. The annuity wins if you live very long - it cannot be outlived - and loses if inflation bites or you die early with surrendered principal. The ladder wins on flexibility and legacy but can be outlived if returns disappoint. Most retirees blend: floor essential expenses with annuity income, keep upside liquid.
- Does inflation erode annuity payments?
- Level-payment annuities yes: at 2.5% inflation, a $2,750 payment holds only about $1,460 of today's purchasing power after twenty-five years. Inflation-adjusted annuities start paying roughly 20-30% less but preserve real value - the trade mirrors buying power insurance explicitly rather than implicitly.
- What happens to my money if I die early with an annuity?
- On a pure life-only payout, nothing - payments stop at death and the insurer keeps the reserve. Refund or period-certain riders return remaining value to heirs but cut the starting payment materially, typically 5-15%. This legacy sacrifice is the annuity's core cost for its core benefit.