Dear Dr. Don,
I am 72 and my husband is 77. All of our money is invested in a traditional IRA in my name. The account is partially invested in the market (35 percent), partially invested in municipal bonds (20 percent) and there are also some CDs (45 percent) in the account. The approximate value of the account is $225,000. I am very nervous about the market and am very conservative. Do we have our money invested wisely? I've also wondered about fixed annuities.
-- Anxious Alice
I'm concerned about you holding municipal bonds in your IRA account for a couple of reasons. First, the IRA account is tax-deferred and all distributions out of the account are taxed at ordinary income rates, so tax-exempt municipal interest income is taxed on distribution. Take a look at an earlier column "Invest muni funds in an IRA?" for more detail.
Second, the municipal bond market has seen prices fall on investor concern over funding issues in state and local government. The municipal bonds in your portfolio may have already taken a hit based on these concerns. You didn't say whether you are in individual issues or invested in a bond fund, but you would want to review these holdings with your investment professional.
It's hard to determine if your asset allocation to the stock market and to CDs, along with your muni bond investment, is the appropriate asset allocation for the account without knowing the big picture on your health, your insurance for long-term care and health, the equity you have in your home and your retirement income picture. The municipal bond and CD investments aren't providing any hedge against inflation. The market portfolio should provide a hedge against inflation, but you're very anxious about these holdings. There may be a better way for you to gain that inflation hedge with less market risk.
I think it would be worth your while to consult with a fee-only financial planner to discuss how your portfolio is invested and your goals for that investment. The Bankrate feature "Financial planners: Not just for millionaires anymore," provides a nice overview on selecting a financial planner.
Fixed annuities can provide a guaranteed income over a lifetime. There are a lot of options in how these annuities are structured. A joint life annuity provides a lifetime income that lasts over both your lifetimes. An inflation rider can have the income indexed to inflation, but it's a very expensive option to add to the policy.
Since the IRA account is already subject to required minimum distributions, or RMDs, you would want to work with an insurance agent and your tax professional to make sure that your choice of annuity contract is appropriate in the IRA.
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