MEG GREEN
Q:I am 63 years old. Last year I went from full- to part-time work. My husband is 63, retired and collecting Social Security. I have a 401(k), worth about $200,000 and a personal account with Vanguard worth about the same. Our house and cars are paid off and we pay off our credit cards monthly. I plan on retiring at 66 at which point I believe we will need an income of about $50,000 a year. Does it make sense to purchase a variable annuity? If so, how much of our savings should we use?
I've been told for someone in my position, although fees may seem high, a variable annuity will give us an income for the rest of our lives at a return that, combined with Social Security and my 401(k), will be sufficient and safe. Can you give us some guidance? I've heard so many negatives about annuities, and yet I'm now being advised to get one by two different financial advisors.
Honey & Paul Orland
Miami Beach
A: Annuities are for specific purposes, one of which is to save for retirement, when you'll no longer have your salary. It's like an unlimited after-tax pension plan, where you defer paying taxes on the dividends and capital gains each year, enabling you to save extra. From my perspective, annuities are not to invest in once you get close to retirement, and certainly not inside of an IRA. I contend it won't necessarily provide you any more income than a solid portfolio of well-tended, tax-sensitive mutual funds, which can have far lower costs along with potential tax savings. As for guaranteed income, can you guarantee the amount you'll be needing to spend way down the road? Remember how young you are. Then how can you feel comfortable with a fixed income?Besides, most importantly, you'll need liquidity in your retirement years, something annuities can limit. That precious, after-tax savings you've accumulated should stay within your reach -- and not placed inside of an annuity. Sounds like you need a financial planner who will look at the whole picture, including taxes, and not just what he or she has to sell.
Meg Green is a certified financial planner. Mail questions to her c/o Sunday Business, The Miami Herald, 1 Herald Plaza, Miami, FL 33132 or e-mail askmeg@MiamiHerald.com. Include full name and city of residence.
