What do annuities cost and what benefit do they provide?

Continuing the discussion of annuities I'm curious if these would work as part of a retirement plan. But I don't even know what they cost or how much monthly payment they can provide. I'm looking at the Fixed Immediate annuity with inflation adjustment here.

I have done some research on Vanguard's annuity page. From that page click on the 'Learn More' link under Fixed Payment Option. This opens a popup window. On that window scroll down a little and click the 'Get an Instant Quote' link. I'll go through a couple examples...

Consider someone who wants to retire early:

From the Vanguard Instant Quote page you can figure the costs of an annuity or the payment from a lump sum. For example I put in information for a 50 year old man and a 46 year old woman and selected an inflation adjusted annuity with 100% joint survivorship. If I paid a lump sum of $100,000 then the annuity would pay out $318.45 a month for the rest of the life of the man and wife. That basically means that the annuity would pay out the $318.45 amount monthly for the life of both the man and the woman and since its inflation adjusted it will increase the payment based on the CPI rate. If I drop the survivor benefit down to 75% instead of 100% then the payout is $332.16 a month. So $100k will buy a married couple a $318 monthly annuity at age 50.


For a 50 year old man and 46 year old woman it would cost $202,281 to get a 100% survivorship joint annuity that paid $7,500 a year for the rest of their lives. The tool doesn't let you figure annuities for very large amounts, so I'm estimating larger figures by multiplying by 10. Multiplying by 10 I figure that in order to get an annuity $75,000 annual income with inflation adjustments you'd need to pay $2,022,810. For a 75% survivor annuity paying $75,000 a year the cost is $1,940,793.


So if you had about $2M in the bank and are 50 years old and married to someone 46, then you could buy an annuity that would give you $75k annual income with annual inflation increases for the rest of your lives.


Now lets look at someone age 65 retiring now.

Lets say you've worked all your life and saved a lot of money in your 401k. You make a decent living and have accumulated $700k in your 401k total. You are now ready to retire and considering buying an annuity with your retirement funds. You have a spouse who is also 65. If you take that $700k and buy a 100% joint survivorship annuity with inflation adjustments then you would get a monthly payment of $3000. If you had just $100k saved then you would be able to afford an annuity with a $428 monthly payment. So $100k will buy you a $428 monthly annuity at age 65.


These examples give some idea of how much annuities cost and pay out. The exact numbers will vary and depend on the exact age of the annuity owners and the details of the annuity. I'm only looking at Vanguard here of course so other vendors would have other options with differing prices.

Is this a good buy? I'll discuss that in the future.