retirement

Annuity can offer reliability in retirement

Don TaylorDear Dr. Don,
My husband is 79 and in fair health. Should he pass before me, I would receive only his Social Security benefits. We have approximately $200,000 in savings. We need to have this money working for us versus what it's doing now, which is nothing much.

We have talked to a couple of insurance firms about annuities. They're anxious to do business with us, of course, but the products are so complicated and, as you can see, I can't invest with any risk. Annuities seem to be a fairly safe way to go, depending upon the kind we choose. Could you please give me some guidance?

Thank you,
-- Patsy Payments

Dear Patsy,
Annuity products can be very useful in retirement because they can ensure you don't outlive your income by providing income until your death. How much income depends on the type of annuity, how it's invested and what options you've purchased within the annuity contract.

An immediate fixed annuity is a decidedly uncomplicated product. Payments start immediately, in contrast to a deferred annuity, where payments start at a point of your choosing in the future.

You put your money down, and you buy a monthly income stream for life. The higher the interest rate the insurance company uses in calculating your payment, the higher the monthly payment. Options are available to guarantee that you get all the money back that you invested because one of the biggest concerns for immediate fixed-annuity purchasers is, "What happens if I get hit by a bus tomorrow?"

A variable annuity is more complex. With a variable annuity, you are investing in funds, and the annuity's performance depends on the funds' performances. Since you're risk averse, I don't see you ramping up risk through investment choices within variable-annuity funds. Variable annuities can be structured with minimum-income guarantees and many other options.

I'm a big proponent of financial flexibility. Annuity contracts aren't very flexible. I don't see a need for you to rush into one at this time, even though you're not earning much of a yield in your savings. If you have adequate income now in retirement as a couple, you can wait to buy an immediate fixed annuity until you need the income when you're a widow.

If you own your own home, you could also look into a home equity conversion mortgage, or HECM -- more commonly known as a reverse mortgage. Like annuities, it's a way to provide you with an income stream over your lifetime. The decision to do this now versus after becoming a widow is fairly complicated. You'd certainly want to discuss this option as a couple and consider hiring a fee-only financial planner. Reverse-mortgage counseling is required prior to entering into a HECM.

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