Is an Annuity Right Choice for a Rich Retiree?

Dear Dr. Don, I am 64 and have a government retirement pension and health benefits. I get about $4,200 per month from the pension. I also have about $220,000 in cash and another $10,000 invested in an individual retirement account, or IRA, with a brokerage firm. Should I buy an annuity, a house or something else? -- Greg Grasp

Dear Greg, Having $220,000 sitting in cash doesn't make all that much sense, but I don't know enough about you to decide how you should invest your retirement nest egg. If you're able to live within your means on your pension benefits, the savings are for emergencies, discretionary spending and any plans you have for leaving a legacy.

Retirees should tread cautiously before signing an annuity contract. There are so many different ways to invest in annuities that it's impossible to answer the blanket question, "Should I buy an annuity?"

Are you considering a variable annuity that invests in mutual funds, such as subaccounts, or a fixed annuity that pays a fixed rate? Do you want to start receiving payments immediately, or are you deferring annuity payments until some point in the future? Do you want income guarantees, payments based on joint life expectancies and any payment guarantees to a beneficiary? These options cost money and influence your annuity payments.

Why do you want to buy a house? Do you own a house now and are thinking about buying an investment property, or are you looking to buy a home that would be your principal residence? The arguments for buying a home now in many real estate markets are that prices are low, and mortgage interest rates are at record lows.

What I want you to do is figure out what life goals you want your retirement nest egg to help you accomplish, and find the lowest-risk approach to investing that will let you reach those goals.

Having the money sit in an insured savings account keeps the principal safe from loss, but you're seeing its purchasing power decline over time because of inflation. Inflation-indexed investments, such as Treasury inflation-protected securities, or TIPS, can protect you against the ravages of inflation. But they've become expensive, so it's hard to recommend them at their current prices. A more balanced approach to investing should increase your wealth over time, but including different types of investments, such as stocks and bonds, adds an element of uncertainty in the portfolio's valuation.

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