Christine Dugas, Money Watch columnist from USA Today answers reader questions about saving protecting and growing money. On March 22, 2013, I answered this question. Q: When my wife retires this year she will receive a lump sum retirement benefit. We are trying to decide what to do with it to provide a steady monthly income stream. Should we invest in a deferred annuity? Or are there other good vehicles? It’s hard to get information without being sold a product.
“One thing to consider before determining what to do with your wife’s retirement benefit is to look at your overall household retirement income needs. People often look at these decisions as separate events instead of looking at the big picture.
“When you are retired you will need current income. An immediate annuity, and not a deferred annuity, is recommended. But remember annuities are complicated and often rife with high, hidden fees and restrictions.
“Once you purchase an annuity, it cannot adapt to changing financial needs, and you will give up the opportunity to transfer money to your heirs when you die, although some may include an option for a survivor benefit. An annuity is purchased from an insurance company as a way to transfer longevity risk. And you would be counting on them to consistently make monthly payments.
“Without an annuity, you need to hold a cash reserve equal to two years of spending and invest the rest in a balanced portfolio. Each year, you should rebalance that portfolio to replenish your cash reserve, taking up to 4% from your portfolio to fund your additional annual expenses. This provides flexibility to handle different circumstances year to year while potentially leaving money to your heirs says Peggy Kessinger, a NAPFA-Registered Financial Advisor with Cedar Financial Advisors, Beaverton, Ore.