Q. My wife and I are both 63. We feel well positioned for retirement in three more years. Our financial adviser has suggested that we move some money currently in CDs into annuities in order to earn more interest and save on taxes. My reservation is that I think I remember you once writing about annuities as one of the least attractive investment alternatives because they are essentially insurance policies with high fees. Am I remembering correctly or misunderstanding what you may have written? How do you feel about annuities for someone who is a relatively conservative investor, and not interested in additional insurance coverage. —D.K., Cedar Rapids, IA
A. The word annuity is an umbrella that covers many different kinds of financial products marketed by insurance companies, so it would be foolish to generalize that all annuities are poor solutions for personal finance issues. There are three kinds of annuity contracts that can be quite useful.
They are: single premium immediate annuities that provide a guaranteed lifetime income; CD-like annuities that provide secure tax-deferred accumulation of interest; and term annuities that are like reverse loans. They return your principal, with interest, over a designated time. All three serve to transport purchasing power through time. And that’s one of the big things we are dealing with as we approach and enter retirement.
The annuities that make poor choices are variable annuities that essentially wrap mutual funds in an expensive insurance contract; fixed index annuities that hide the costs but often disappoint investors while tying up their money; and the expensive “living benefits” riders that are now used with both contracts.
These contracts are a good way to transfer your wealth to an insurance company, if that is what you want to do. But there are better ways to provide for your own financial security, including the three types of annuities that I mentioned first.
Q. I am writing because I need help with figuring out how to enjoy our somewhat forced retirement. My husband is 66 and I am 63. We both lost our jobs in 2014 and began collecting Social Security. Together with my husband's pension, we have an annual income of $60,000.
We are currently downsizing to cut our housing costs. We will be making a profit of $500,000 on the sale of our home. Our new home will be completely paid for.
We have about $250,000 in managed IRA accounts. But we are very unhappy with our current advisor's 1 percent fee and poor performance. I have a Simple IRA from my old job with $80,000 in it earning 1.5 percent a year. We have $100,000 in a money market earning 0.85 percent.
We are not savvy investors. We are afraid of risk, but we hope to be able to draw about $30,000 a year from these savings and travel while we are still able.
Can you suggest how we should invest these funds so we can enjoy our retirement without running out of money? Is purchasing an annuity a good option? If so, which would you recommend? —M.B., Newark, NJ
A. This is more a cash flow question than an investment choice. If you want $30,000 a year, every year, from your $430,000 nest egg you are likely to run out of money pretty early. That figures to an annual withdrawal rate of 7 percent. Taking that much has proven to be hazardous to most nest eggs.
An alternative is to select a time period, such as 3 years, and create a travel fund for that period. That would mean you have a $90,000 travel fund and a $340,000 lifetime expense account. If you use a 4 percent withdrawal rate from the lifetime expense account, you’ll likely have about $13,600 a year for other spending for the rest of your life.
Expand the travel fund to 5 years and you’ll need to set aside $150,000, leaving $280,000 for lifetime expenses. That should provide an additional $11,200 a year for other spending.
Basically, you’ve got a trade-off between traveling now and long-term income.
Since your travel spending will be in lumps at irregular intervals it isn’t suited to a term annuity that will provide you with monthly payments for a particular period of time. As an alternative, you might search for a high-yield checking account. You can search on bankrate.com.
Scott Burns is the retired Chief Investment Officer of AssetBuilder, the creator of Couch Potato investing, and a personal finance columnist with decades of experience.