A retired couple, John and Susan, both 67, are evaluating whether to move their assets into annuities or target date funds. They have $1.2 million in a pre-tax IRA, $750,000 in taxable investments, and receive $45,000 annually from Social Security.
If they invested their $1.2 million IRA in a single premium immediate annuity, it could yield about $82,220 per year in pre-tax income, according to Schwab's Income Annuity Estimator. Selling their $750,000 portfolio, after capital gains taxes, might leave approximately $558,000, which could purchase a separate annuity paying around $38,280 annually. Combined, annuities could provide roughly $120,500 per year before taxes.
Annuities offer guaranteed lifetime payments, but payments are typically fixed and not indexed for inflation, posing a risk that income value could decline over a long retirement. This risk may be greater for renters or city residents where prices rise faster.
Financially, sticking with their current investments and following the 4% rule might offer a stronger income stream more easily hedged against inflation. However, annuities could provide security and peace of mind if guaranteed income is the primary concern.
Target date funds are automated portfolios managed based on a predetermined date, shifting investments from aggressive to secure as the target approaches. Since John and Susan are already retired, they have essentially hit their target date, making these funds potentially less useful for them.
A robo-advisor might be an option, using algorithms to manage investments with goals like modest growth and strong risk protection. This offers a hands-off approach, though some may prefer human financial advisors for services beyond investment management.
Annuities and target date funds are common products for retirement planning, with annuities focusing on guaranteed income and target date funds on strategic investment management over time.