Ask Dr. Don By Don Taylor, Ph.D., CFA • Bankrate.com

Investing for income

Dear Dr. Don,
My life partner passed away a year ago. Everything was jointly owned, and I have since had a new trust drawn up. Our retirement investments currently total about $100,000, including stock market certificates, mutual funds, an annuity and an IRA as well as $30,000 in a CD and a savings account.

Upon his death, I received $325,000 from life insurance policies. I am 50 years old and on disability retirement. My income is nontaxable. I need, however, approximately $12,000 to $15,000 a year to make up for his lost income. What is the best way to accomplish this?

I am very conservative in my investments and want to hold on to the principal. I am considering a short-term laddered CD with the insurance money for now (three, six, nine and 12 months) until interest rates go up. My financial adviser is steering me toward an annuity. What are your thoughts or suggestions?
Just Curious

Dear Curious,
I'm sorry for your loss. Your adviser's recommendation is worth considering. In the current interest rate environment, an annuity can accomplish your income goals with little or no risk. You can purchase an immediate annuity using the insurance proceeds and get a guaranteed income for life.

Annuities can be structured in a lot of different ways, so it's hard to make generalizations about how they work. You can structure an annuity to pay a lifetime income or income over a set period. Inflation riders are also available that will allow your income to increase over time with inflation. Here are some examples of the two types:

Lifetime income

• Single lifetime income with no payments to a beneficiary
• Single lifetime income with up to five years guaranteed to your beneficiary
• Single lifetime income with up to 10 years guaranteed to your beneficiary
• Single lifetime income with up to 15 years guaranteed to your beneficiary
• Single lifetime income with up to 20 years guaranteed to your beneficiary

Period certain income

• Guaranteed income for a five-year period certain only
• Guaranteed income for a 10-year period certain only
• Guaranteed income for a 15-year period certain only
• Guaranteed income for a 20-year period certain only
• Guaranteed income for a 25-year period certain only

If you purchased an immediate annuity for $325,000 that guaranteed a lifetime income with no death benefits, it would pay you about $1,800 a month for as long as you live. The upside is you can't outlive your income. The downside is you've spent your principal to get that guaranteed income stream. Immediateannuity.com provides estimates for the different payment options without contacting an agent.

Let's assume that the $1,800 a month ($21,600 a year) is a good estimate of a single lifetime income immediate annuity for you with no payments to a beneficiary. That's about $6,600 a year over your current income requirements. You can invest the excess income over time to re-establish a principal balance.

If you invest $325,000 in the financial markets, you'll need to get a return of 3.70 to 4.62 percent to earn $12,000 to 15,000 annual income. You'll want that to increase over time with inflation. Bond yields will rise with rising inflation, but that's bad news in an existing investment portfolio where rising bond yields means falling bond prices.

A laddered CD or bond portfolio is the fixed income equivalent of dollar-cost averaging in the stock market. Your suggestion of using a stepladder initially while waiting on higher rates is a good idea if you believe that interest rates are at or near their lowest levels in this interest rate cycle.

Since your step laddered CD portfolio isn't going to provide enough income, you'll start spending principal immediately to meet your income needs. You're counting on interest rates rising over the next few years, so your portfolio can start meeting your income needs without the continued need to use principal.

A CD-type fixed annuity typically returns more than a comparable maturity CD. The surrender charges on these annuities decline over time to zero at the end of the term. You could lock in a return over the next 10 years close to 5 percent and Annuity.com shows current rates. These investments aren't insured but do carry an AM Best rating evaluating the financial strength of the issuing financial institution. Don't go with lower rated firms to get a higher interest rate.

If you can devise a plan to meet your income needs without buying an immediate annuity, then there's no compelling reason to buy the annuity. Keeping the money under your control is the best solution.