Do I need to invest in an annuity after I retire if I want to enjoy a secure retirement?

Although you may not realize it, you already get an annuity in retirement. It’s called Social Security, and it gives you a monthly payment for life that rises with inflation. So the real question is: Do you need another annuity in order to have a secure retirement? The answer: It depends.

If by “need,” you mean you would seriously jeopardize your retirement by forgoing an annuity, I’d say the answer is no. For a variety of reasons valid or not, most people don’t invest any of their retirement stash in an annuity and many, if not most of them, get along fine. So it’s not as if you’d be making a huge retirement-planning mistake by passing on an annuity.

Here’s a good way to determine whether that’s the case. Go to an interactive retirement budget worksheet and divide your estimated retirement expenses into two categories—essential outlays (housing, transportation, insurance, etc.) and discretionary expenditures (travel, entertainment, etc.) Tally each category, and then see how your essential expenses stack up versus what you’ll get from Social Security (and a pension, if you receive one).

After going through this exercise, chances are you’ll find that your essential expenses exceed the guaranteed income you’ll receive from Social Security and any pensions. Which raises the issue of how to fund that gap. Many retirees like the security of knowing that all or most essential expenses will be covered even if the financial markets founder. They can then rely on draws from savings to cover discretionary items, which can more easily be pared back if necessary. If that idea appeals to you, an annuity—specifically, an immediate annuity—may be worth considering.

The premise behind an immediate annuity is simple. In return for handing over a portion of your savings to an insurer, you receive a monthly payment for the rest of your life. Today, for example, a 65-year-0ld man would get about $550 a month for life for $100,000; a 65-year-old woman would receive about $515; and, a 65-year-old couple (man and woman) would receive roughly $425 a month as long as either one remained alive. (You can see how the payments change for different ages and different amounts invested by going to an annuity calculator.)