Avoid variable annuities if you need cash

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Dear Dr. Don,
I recently talked with a financial adviser about retirement and investing a fair amount of money inherited from my brother. I am a single mother of two. One is in his first year of college and the other is a disabled 14-year-old. I put money aside for my son’s college, but I am concerned about retirement, and I want to keep some money liquid. I am 56, gainfully employed and making about $36,000 a year. I also want to leave money to my kids. My ex-husband passed away last year.

The adviser suggested putting 90 percent of the money in a variable deferred annuity with guaranteed lifetime benefits. I am very leery about putting 90 percent of the money into an account that I won’t be able to touch for at least five years. And the ongoing costs of annuities are a worry. Can you give me some advice?

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— Annie Annuity

Dear Annie,
Would I recommend that you put 90 percent of the inheritance into a variable annuity with a guaranteed lifetime withdrawal benefit for a 56-year-old single mother of two making $36,000 a year with liquidity needs, retirement concerns, one disabled child and one child in college? I would not.

Changing your mind about investing in an annuity can be a very expensive decision because of the surrender charges associated with investing in them. Surrender charges decline over time. Also, variable annuities typically allow a person to withdraw some money each year from the account without paying a surrender charge. That provides some cash.

People looking at variable annuities need to shop around. They should also look at the financial strength of the issuing company and understand the details of the annuity contract.

As a single mother of a disabled child, you need to think about what would happen if you die first or can no longer care for him. Your inheritance could be used to create a special needs trust. This may be more important than planning to fund the remainder of your child’s college education, or even your own retirement planning. There are financial professionals who specialize in this type of special needs planning. Make sure your adviser understands your own goals and issues.

Your retirement income options may be better served by using the inheritance to fund retirement income needs early in retirement so you can avoid drawing Social Security before your full retirement age.

You told me that your disabled child is receiving Social Security benefits linked to your ex-husband. If you were married for at least 10 years, you are eligible for a survivors benefit. Since you are caring for a disabled child younger than age 16 and also getting benefits, you do not have to meet the length-of-marriage rule. The child must, however, be your former spouse’s biological or legally adopted child.

You’re making too much money right now for an ex-spousal survivors benefit to do you much good. Since you are younger than the full retirement age, the Social Security Administration deducts $1 from your benefit payment for every $2 you earn above the annual earnings limit. In 2013, that earnings limitation is $15,120. There is also a maximum family amount paid based on the basic benefit rate. While Social Security wasn’t the focal point of your question, it will affect your retirement income. You’ll want a financial professional to consider the options in drawing survivors benefits and benefits based on your work record. In a way, Social Security can be viewed as an annuity because it is indexed to inflation.

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