Annuity may be poor choice for mother

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Dear Dr. Don,
My mom has some stock that has been bought back by Alfa Insurance. It is a very large sum of money ($352,000). She was receiving dividends off of this every three months. She is 79 and my father died in 2001.

I have heard an annuity is a good vehicle for her to continue to receive money. Is an annuity her best choice?

Michael Minuet

Dear Michael,
I don’t like the idea of your mother buying an annuity with the money if all she needs to accomplish is to replicate the dividend stream of the Alfa Insurance stock.

While annuities can be structured in many different ways, the core issue is what happens at her death. With a basic immediate annuity, there are no payments to a beneficiary.

An immediate annuity would allow her to invest the lump sum and receive a lifetime monthly income of around $3,351. That would drop to $3,242 if five years of payments were guaranteed.

Ten years of guaranteed monthly benefits reduce the payment to $2,915. Fifteen years of guaranteed monthly benefits reduce the payment to $2,527. You get the idea. (I used for the annuity quotes.)

She really shouldn’t look at this money in isolation from the rest of her investments, pension income and Social Security benefits. Her general health and any desire to leave an estate to her heirs are also important factors.

I recommend spending the money to bring a fee-only financial planner to the table. Have the planner look at the big picture and make an investment recommendation. If you and your mother can’t get comfortable with the recommendation, get a second opinion.

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