We have $4,000 a month in retirement income — and want to put $200,000 toward an annuity. Is this a wise decision?

United States

Dear MarketWatch, 

My husband is 70 and I am 63. We are both retired and have a combined monthly income of $ 4,000. We are considering purchasing a $ 200,000 annuity that would cover both of us, and I would like to know what our monthly disbursement would be, and how long it would take to process this investment before we would receive a monthly payment.

We have an appointment with a financial adviser this week. We hope we are headed in the right direction. Is this a good investment?


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Related: My wife and I are in our 60s. She was a stay-at-home mom. Can we retire on early Social Security and $ 1.6 million in savings? 

Dear Annuitizer, 

I’m glad to hear you are meeting with a financial adviser who can provide more insight into the various types of annuities that work best for you.

Annuities can help with increasing your monthly income in retirement. They’re not for everyone, and they have garnered a bad reputation in the past because of the sales-driven nature of the insurance business. That said, the government has been making it easier for retirement savers to access these plans, and investment firms are right behind, creating investment products that incorporate annuities into a retiree’s eventual finances. I wrote about a few of those developments in MarketWatch’s latest “Best New Ideas in Money” series.

There are many different types of annuities, but two common forms are immediate annuities and deferred annuities. With immediate annuities, as the name implies, you give up a lump sum of money for a steady and guaranteed income stream. With the latter you pay, either as a lump sum or over time, for an income stream that will begin at a later date. You will have to find the annuities with the right terms for you and your husband’s needs and wishes, as they can vary. 

Be aware that some kinds of annuities are tied to the stock market. Fixed annuities are not one of those — they simply provide you an income stream at a specified interest rate, and that’s it. Variable annuities, on the other hand, have an investment component, which can have a higher return (and a higher risk). An “in-between” option, a fixed-indexed annuity, provides payments with just a piece of the overall payout linked to the market. 

Is your money better served elsewhere?

It isn’t enough to just decide you want an annuity for extra income. Look at how your current retirement income is working for you, and if you need more money to pay the monthly bills or not. Some advisers will suggest against an annuity for the very reason that you’re giving up a big sum of money for an income stream you may not really need, and that the money could be better served elsewhere in, for example, a balanced investment portfolio. 

There is no one right answer, so here are some questions: What are your current and future income needs? Do you have any other money outside the $ 200,000 to fall back on for emergencies? What are the terms of the annuity regarding survivor benefits for when one spouse predeceases the other? What kind of inflation adjustments does it have? And, finally, as with any financial product, take all tax implications into account.

If this is your first time speaking with a financial adviser, or even with this financial adviser, be sure to vet them. A financial planner, such as a certified financial planner, will incorporate an annuity recommendation into your overall finances to make sure it is best for you, while a salesperson may not be held to the same standards. Ask the adviser how they are getting paid for their recommendations, and ask to see their credentials. 

Research the companies selling the annuities, too, to make sure they’re secure and legitimate. You can look up insurance companies’ ratings to check their overall health and stability. Here is a list of companies that rate insurance providers, shared by the Office of the Insurance Commissioner in Washington state. 

Remember that you don’t have to go with the first annuity, or adviser, that you come across, so feel free to shop around before making final decisions. This is your nest egg, and annuities may (or may not) work for your financial goals and needs, but that doesn’t mean all annuities are the same. Before you make any decision, make sure you are both well-informed and 100% comfortable with the product.

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Have a question about your own retirement savings? Email us at HelpMeRetire@marketwatch.com