Ask Terry Questions Annuities for retirees?

Annuities for retirees?

By Terry Savage on April 26, 2014 | Financial Planning / Retirement

I’m 68, wife is 65. Wife will soon retire from Chase and get a lump sum $95,000. Chase is recommending an annuity she could roll it into. Do you think rolling it into an annuity is a good idea, and if so, what type of annuity? There are so many! Would a mutual fund IRA in a conservative fund geared toward people our age be a better idea?

Terry Says:  BEWARE the use of annuities.  Yes, they give you a check for life.  BUT, because of inflation, that check may not buy very much in 25 years when you’re likely to need more cash. In fact, at only 3% annual inflation, the spending power of that check would be cut in half in 25 years!  When you buy an “immediate annuity” or check-a-month-for-life, you lose all flexibility with your money.  Unlike even Social Security, there is no inflation adjustment in that check.  And if you die, the insurance company keeps the balance of your cash!

I assumed you were talking about an “immediate” annuity.  There is another type of investment — a tax-deferred annuity.  There the money grows tax-deferred in either a fixed rate or “variable” product.  The latter is a mutual fund-like account where your return depends on your investment choices.  Then, when it is withdrawn — after a certain penalty period — you’ll pay taxes on the entire amount.  That can defer current taxes, but subject you to penalties for early withdrawal if you need the cash.

If this is a “lump sum” that is part of a tax-deferred plan from work, you may be able to ROLL it directly into an IRA.  Ask if that is possible.  Then you wouldn’t need an annuity at all, since the money would remain tax deferred.   Just go to Vanguard,Fidelity or T. Rowe Price and ask them to handle the rollover so you aren’t taxed. They will advise you on a conservative investment plan, and also a withdrawal plan.

If you are not allowed to ROLL this money, but must take it in a lump sum,  then be sure to check with your accountant about the impact of a lump sum on not only your taxes, but on your  Social Security and Medicare benefits and costs.

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