Dear Quentin,
I’m in my early 70s, and suddenly widowed.
My husband had life insurance, so I have money. I just don’t know what to do with it. I have always stayed out of debt, saved, and yet I also spent money too. We did pretty decently. I don’t follow the market as we never knew how any of it works. A financial adviser from a big institution (where we kept our 401(k)s, Roths, etc. for years) is working with me for 20% of what I have.
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He’s suggesting it should go to a single-premium immediate annuity. I do need the additional monthly income and it would be good to have with my pension and Social Security. For the record, next year will be my first for required minimum distributions (RMD). My hubby never got to that age, and there are no children to consider.
Is that a “safe” normal amount to use? The rest will be invested very conservatively and/or safe. I’m slowly learning. Better late than never.
Planning the Next Chapter
Dear Planning,
If in doubt, do nothing.
When I first read your letter, I was alarmed. I read it to mean that he was charging you a 20% commission, but now I see he wants to allocate 20% of your assets to annuities, so I’m only slightly alarmed. It’s still a big chunk of your investable cash, and you recently lost your husband, so this is a vulnerable time for you emotionally and financially.
Immediate annuities provide a guaranteed income, similar to Social Security. The income obviously depends on your initial investment, the interest rate you lock in at and the kind of payment schedule (monthly, quarterly or annually). A basic annuity with a 5% interest rate would give you $5,000 a year, if you invested $100,000. If you die after one year? Bad luck.
If you are in very good health and have reasonably good genes, it could be a good bet. By investing 20% of your investable wealth in an annuity, you are locking up that cash. In other words, it has less liquidity. You are also foregoing any rises in the stock market over the term of the annuity (but similarly hedging your bets against a severe downturn in the market).
An annuity is neither a bond or cash. It is an insurance contract. An immediate annuity gives you income immediately, as its name suggests, while you may have to wait 12 months with other annuity contracts. You are already protected from inflation with your 401(k)s and Roth IRAs, and Social Security. You can read more about immediate annuities here.
A ‘moderately conservative’ approach
Given that you are in your early 70s, you should be “moderately conservative” with your assets, according to Charles Schwab. That effectively means investing 40% in stocks, 50% in bonds, and 10% cash/cash investments; at the age of 80 and above, you should be “conservative” with 20% in stocks, 50% in bonds, 30% in cash/cash investments.
“At the start of every year, make sure you have enough cash on hand to supplement your regular annual income from annuities, pensions, Social Security, rental, and other regular income,” the financial-services company says. “Hold the money in a relatively safe, liquid account, such as an interest-bearing bank account or money-market fund.”
The average peak-to-peak recovery time for a diversified index of stocks in bear markets was roughly 3.5 years, it adds. “So it’s wise to keep two to four years’ worth of living expenses in short-term bonds, certificates of deposit, or other reasonably liquid accounts. This way, you’ll have access to cash during a downturn if you need it, without selling stocks.”
Now, about those alarm bells: Fees for annuities can be as much as 10% of the value of your contract. “Typically, the more complex the annuity, the higher the commission,” according to Annuity.org. “The commission on a 10-year fixed index annuity ranges from 6% to 8%.” They can include commissions, administrative fees, mortality expenses, and surrender charges.
Many financial professionals do not actually recommend annuities to their clients. Did your adviser explain the punitive early-withdrawal penalties to you? If you took $20,000 you could pay 5% or $1,000, which applies to the entire annuity withdrawal amount. “If you withdraw $50,000 instead of $20,000, your fee would rise from $1,000 to $2,500,” Annuity.org adds.
Avoiding unhelpful financial advisers
There are all types of folks who call themselves financial advisers: They may invest your money in ETFs and/or mutual funds, actively manage your finances and/or give you overall advice and not even touch your money. Bad advice does not always equate to disreputable used-car salespeople. (For what it’s worth, Index ETFs SPY traditionally have low fees.)
Some basics before you choose a financial adviser: Not all money managers are fiduciaries — professionals who have to act in their client’s best interest under the Investment Advisers Act of 1940. Find out whether your adviser is a fiduciary — rather than, say, a broker-dealer — and whether he’s a member of the Financial Industry Regulatory Authority (Finra).
Certified financial planners have similar codes of ethics. Most investment contracts include an arbitration clause for resolving disputes. Not everyone is cool with that, even though Finra and the Securities Industry and Financial Markets Association, a trade group representing securities firms, banks and asset managers, argue that arbitration saves all parties time and money.
Don’t get bedazzled by flow charts and financial advisers in fancy offices, and lock up too much of your money too soon. Take your time. You don’t have to go with this financial adviser, and if you feel under pressure, that’s a red flag. You have just lost your husband, and if he expects you to make big decisions about your finances right now, he’s not the adviser for you.
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