How a 66-Year-Old Couple Turned a $1.2 Million 401(k) Rollover Into a Monthly Paycheck Without Buying an Annuity

Plenty of couples fit this bill both 66, who have just moved a $1.2 million 401(k) into a traditional IRA. A few weeks later an insurance agent pitches them an annuity: hand over part of the money and get a check for life. Their question: can they build a reliable monthly paycheck themselves? Below is one way they could do it, marked as an illustration, along with what they give up by passing on the annuity.

Rollover Mistakes That Cost Money Before the First Check

The rollover method affects how much tax is withheld. When a plan pays a rollover straight to the IRA trustee, generally no tax is withheld. When the check goes to the account owner instead, the payer must generally withhold 20%. Once the money is in the IRA, it remains untaxed until it comes out, and then it is taxed as ordinary income under 26 U.S.C. § 408(d)(1).

Two rules help this couple. They are past 59½, so the 10% additional tax on early distributions does not apply under 26 U.S.C. § 72(t)(2)(A)(i). Required minimum distributions also don’t start until the calendar year in which you reach age 73, which leaves them several years to decide how much to take and when.

Layer One: A Treasury Ladder Covering Two Years of Spending

Example illustration: the couple picks a 4% starting withdrawal. On $1.2 million that comes to $48,000 a year, or $4,000 a month before taxes. This figure is a planning assumption. They put two years of withdrawals, $96,000, into Treasury bills and notes that mature on a staggered schedule, so a known amount of cash comes due every few months.

As of November 5, 2026, the average yield on 13-week bills was 4.12%, on 26-week bills 4.28% and on 52-week bills 4.36%. The 2-year par yield stood at 4.46%. CDs are an alternative, but the FDIC national average for a 12-month CD was only 1.76% as of October 1, 2026, so buyers need to compare offers. The tradeoff is reinvestment risk: each yield holds only until that bill or note matures, and because the ladder sits inside the IRA, every dollar take is taxed as ordinary income, whatever it was invested in.

Layer Two: Systematic Withdrawals From the Rest of the Portfolio

The remaining $1,104,000 goes into a diversified mix of stocks and bonds. Once a year, the couple sells from whichever holdings have done better and uses the proceeds to refill the ladder, and in a bad year, the ladder covers spending so they don’t have to sell stocks after a drop.

Nothing here is guaranteed. A deep downturn in the first years of retirement (sequence-of-returns risk) can mean smaller paychecks later. Inflation is the other pressure. The research inflation index for Americans 62 and older reached 368.1 in September 2026, up 0.5% from the month before, and it gives heavy weight to housing and medical care. Treasury Inflation-Protected Securities (TIPS) can help on that front: the 10-year real yield was 2.6% on November 5, 2026.

Layer Three: Delaying the Higher Earner’s Social Security

The most annuity-like move costs nothing to buy. If the higher earner waits until 70 to claim, that check grows for each month of delay past full retirement age, rises with each cost-of-living adjustment (3.6% for 2027) and becomes the surviving spouse’s benefit. The federal government backs that income for life. The catch is that the IRA has to cover more spending until the delayed benefit begins.

Taxes and Medicare costs need watching while the IRA does that bridging. The standard 2026 Part B premium is $202.90 a month, and income-related surcharges apply to joint filers with income over $218,000. Large IRA withdrawals could push the couple over that line.

What Skipping the Annuity Gives Up

A lifetime income annuity transfers the risk of a long life onto the insurance company. Its payments are guaranteed only by the insurer’s claims-paying ability, and the state guaranty associations that step in if an insurer fails have coverage limits that vary by state. Without one, the couple bears two risks themselves: outliving the money, and suffering poor markets early, while a purchased income annuity is also usually irrevocable, and its costs are built into the payout rather than listed as a fee.

An annuity may suit retirees who have no pension, have long-lived parents, would sell in a panic during a downturn, or don’t want to manage a portfolio in their 80s. The do-it-yourself approach fits better for people who keep control and flexibility, want to leave money to heirs, and can remains calm when markets fall.

Conditions to Check Before Choosing a Path

• Do guaranteed sources, Social Security plus any pension, cover essential bills? If not, a floor of lifetime income becomes more valuable.
• Can you hold off on claiming Social Security and live on the portfolio in the meantime?
• Would a 25% portfolio decline change how you spend?
• Who in the household will manage withdrawals if the person handling them now can no longer do it?
• How close are your planned withdrawals to the Medicare surcharge thresholds?

Combining the two is an option too. Some retirees annuitize just enough to cover essentials and invest the rest (we laid out the mix, the payment calendar, and the withdrawal order in a free paycheck portfolio guide). Whatever the choice, check the yields on any ladder against Treasury data at the time you buy, and keep in mind that the paycheck figures in this example are illustrative only.

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