Is It Time to Buy Your Own Pension?

"With the market volatility, they're unnerved that they won't know how much income can be generated if they leave their money in the stock market," Lennox said.

An immediate annuity, she said, "gives them peace of mind in terms of how much money they have."

And often an immediate annuity can provide a higher level of income than a safe withdrawal rate from an investment portfolio. An immediate annuity might generate annual income equal to 6 percent to 8 percent of a lump sum amount, Lennox said, while many financial advisers suggest withdrawing about 4 percent a year from a portfolio in the early stages of retirement.

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A second protection provided by an immediate annuity is that it protects you against the possibility that you will outlive your money. This is called longevity risk, and it's something many of us underestimate. Six in 10 pre-retirees believe their chances of living beyond age 85 are 25 percent or less, according to a recent study by the MetLife Mature Market Institute. The truth, however, is that an individual who reaches age 65 has at least a 50 percent of living past age 85.

And with a married couple each at age 65, there's more than a 50 percent chance one of the two will live into their 90s. That's why you need to protect yourself against the risk of longevity.

The chief objection against immediate annuities by many consumers is the loss of capital if you die early. Many retirees do not want to turn over say $100,000 to an insurance company and then only collect back $50,000 before dying.

Lennox, the MetLife retirement strategist, said retirees can mitigate this by first not investing an entire nest egg into an annuity and second by staggering your annuity purchases into a series of steps. This is similar to a laddering strategy employed by investors buying CDs or individual bonds.

The risk of dying shortly after an annuity purchase is certainly something to consider, but let's look at an example to determine whether it's a reasonable risk to take.

Assume for a moment you are age 65 and retiring this year with $500,000. What if you took $200,000 of that sum and bought an immediate annuity? What kind of income would that provide?