• Question
  • Should I put my retirement pensions (approx. $750,000) plus an annuity of approx. $240,000 all in

    Asked by a 74 year old man from Fort Smith, AR on 3/21/2013

    Should I put my retirement pensions (approx. $750,000) plus an annuity of approx. $240,000 all in one annuity that is fixed or variable? Need to understand the differences between fixed & variable annuities. Or should I leave the money in the mutual funds and manage it myself - How do I handle that type of situation and what are the risks. The mutual fund market went up 13% last year, and I would like to draw at least 7.5% a year from my lump sum amounts. Is this a good strategy?

  • Categories: Retirement Planning, Retirement Assets and Savings, Maximizing Returns, Pensions and Retirement Benefits, How to Choose, Annuities


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  • Along with investment diversification and income needs, inflation, liquidity and the desire or need for growth should also be considered. You stated you would like to withdraw 7.5% annually and your mutual funds were up 13% last year. Not knowing which funds you own, it is likely safe to assume those same funds had a negative return 5 short years ago. Over time, a 7.5% withdrawal rate could become unsustainable, especially if the market suffers additional negative returns in the early years of your retirement. Even the much touted 4% annual withdrawal assumption has come under scrutiny (http://www.advisorone.com/2013/01/17/finke-study-warns-4-retirement-rule-is-dead-long-l?page=3).

    Fixed annuities typically guarantee your principal while providing limited growth opportunities and can provide annual lifetime income. Variable annuities do not guarantee your principal, but guarantee a minimum lifetime income based on the performance of the portfolio. The greater risk to principal with a variable annuity should provide opportunities greater growth potential. However, there is no guarantee that the income from a variable annuity is always higher than the income from a fixed annuity. This will depend on each specific annuity offering and how income guarantees are calculated and how each is invested.

    Some fixed annuities require you to completely give up access to your principal altogether in return for a specific guaranteed income stream that could last for only as long as you live, for a specific time period determined up front or provide an immediate income stream that would be guaranteed for as long as the original owner lived and continued through the life of the surviving spouse. These fixed annuities usually have higher guaranteed income streams than fixed annuities that allow you to continue to have access to your principal. Depending on the type of pension you have, you may have similar income guarantees that should be compared with any annuity you are offered.

    Annuities can be an effective investment vehicle for people who are concerned about outliving their income, but it is important to note that some have significant upfront and ongoing fees that could lower your investment return. Surrender fees charged if you withdraw too much too soon are also common, but phase out over time. Putting all you have in a non-liquid investment could become problematic if you have an emergency within a year or two and need to withdraw more than is allowed without penalty from an annuity. The mutual funds you own will also have their own costs associated with them. Typically mutual fund expenses won’t be as high as annuity expenses, but mutual funds obviously have no income guarantees.

    This article may help you further determine what’s appropriate, http://blogs.newretirement.com/2010/03/29/pros-and-cons-of-variable-annuities/. NewRetirement.com also has a calculator for certain types of annuity payouts you can use at https://www.newretirement.com/Services/Annuity_Calculator.aspx.
    In addition, you should review your specific income and liquidity needs, growth goals and risk tolerance with a qualified advisor to help determine what specific portfolio mix is right for you.

    This answer is provided as general information only and provided by Master’s students pursuing a degree in Personal Financial Planning at Texas Tech University. No warranty is made regarding the fitness or accuracy of the information provided in this answer. You should seek advice from a licensed CPA, attorney or Certified Financial PlannerTM as to your unique financial situation.

  • Login to rate this answer:   Answered on 3/26/2013
**All above answers are provided as general information only. No warranty is made regarding the fitness or accuracy of the information provided in this answer. You should seek advice from a licensed CPA, attorney or CERTIFIED FINANCIAL PLANNER™ as to your unique financial situation.