Annuities: a reliable source of retirement income or a risky fee trap? Regardless of how they're viewed, they're often a confusing financial product, especially for those in or near retirement.
This week, Kevin Young, a Davis-based certified financial planner, advises a reader on whether an annuity would be a smart move for generating retirement income.
To see more of Young's "Ask the Experts" advice or to ask your own financial questions, go to www.sacbee.com/ask. That's where you'll also find our other local experts on taxes, investments and wills/trusts.
I am 74 years old and retiring after 54 years of teaching. I get my health insurance through my deceased husband's plan and will be getting an annuity payment of about $4,300 a month from my school district. I have various savings (CDs, mutual funds, etc.) totaling about $190,000. Since my monthly expenses are $5,500, what is the best way to invest the savings to increase my monthly income and minimize my risk?
My financial adviser is suggesting variable rate annuities with death benefits. He recommends that I withdraw the maximum amount from my district funds and invest them in annuities he selects.
What is your opinion? While I am interested in a death benefit, the small print I read does not give me a warm, comfortable feeling about annuities.
Congratulations on your retirement. My first suggestion is to run from this salesperson.
A variable rate annuity with death benefits is a complicated product that is not a pure investment but contains characteristics of both an insurance and an equity type of investment. Annuities can be expensive, with substantial fees and surrender charges. (A surrender charge is the fee charged for early withdrawal of funds from the annuity contract, typically six to eight years.) This is your money and you should not be forced to pay a fee to get some of it back.
Before doing anything, you must educate yourself. All too often, I see seniors being taken advantage of by salespeople who do not have the client's best interest in mind. Think carefully about the most appropriate approach to generate your lifetime retirement income.
Annuities are mainly sold by insurance agents and others who rely on commissions. Ask the salesperson how much he will make in commissions selling you this product.
If you want unbiased, fiduciary advice from a financial professional, seek a "fee-only" adviser who is a certified financial planner (CFP). To find these types of advisers in your area, go to the National Association of Personal Financial Advisors' website: www.napfa.org.
Generating retirement income today is difficult because of low interest rates. The current situation is forcing retirees to add additional risk to their portfolios to generate greater returns, which can be a very dangerous game because seniors may not have time to ride out a major market correction.
For clients near or in retirement, we invest in a conservative, diversified, no-load mutual fund portfolio, as well as building a U.S. Treasury STRIP bond ladder of zero coupon bonds. The ladder is designed to have a set amount of bonds maturing each year. This creates what amounts to a guaranteed paycheck during retirement.
If you're a homeowner and have enough equity, a reverse mortgage also may be an option. I do not generally recommend reverse mortgages because of costs and other factors, but they do make sense in certain situations. In your case, a reverse mortgage might be used to pay off an existing home loan, thereby reducing your fixed expenses and the income needed to support your current lifestyle.