PaulA. Merriman

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Future stupidity? If you’re smart enough to be reading this article, you probably know it’s meant for somebody else. Me too.

Lew Mandell, a retired business professor, at first dismissed the idea that seniors were likely to lose some of their good sense. After studying this issue, he discovered that for many people, financial wisdom peaks when they are in their 50s and then drops off quickly. The result: Many seniors are more likely to make bad decisions even though they are trying to be smart.

One of Lew’s (he and I have become friends since he retired to Bainbridge Island, where my wife and I live most of the year) 22 books is titled: What to do when I get stupid. The title came from a question he was asked about buying an annuity — an idea that Lew at first thought was dumb because so many annuities are expensive, complex and often risky.

When he heard the question What happens when I get stupid? Lew put his 44-year academic career to work, drawing on his experience as a finance professor at several universities including the University of Washington and the State University of New York at Buffalo.

After some study, Mandel concluded that a fixed-life annuity — very different from the variable annuities that are often expensive and risky — might be a good way for seniors to put their finances on automatic and avoid some costly mistakes.

Of course most of us think this will never happen to us. But the research shows that as you get older, not only do you become less competent to understand complex things — you also become more convinced of your ability in this area, Lew said.

One mistake a lot of seniors make, for example, is making major decisions based on emotional advertising, without consulting family members or a financial adviser.

The biggest risk many seniors face is outliving their resources. By guaranteeing an income that never runs out, a fixed-life annuity addresses that risk.

The downside of this arrangement is that such an annuity, once issued, can’t be cashed in. The purchase decision, in other words, is final and irrevocable. But Lew says that’s really the strongest point of a fixed annuity: That’s money you can never be cheated out of.

Without an annuity, you take the risk that you could live so long that your money runs out. You also take the risk that the investments you make could turn out to be very unproductive for the rest of your life.

When you buy an annuity, an insurance company assumes those risks. In return, you give up the potential opportunity to make more money by investing yourself. And of course you can’t leave that money to your family or other heirs.

As you can see, this is an important trade-off, and it isn’t suitable for everyone. But sometimes it works out to be just fine.

Recently I met with a couple in their 70s, who were still working because they didn’t think they had enough money to retire. They had saved $400,000 but needed twice that much to comfortably meet their needs using bond funds. Millions of Americans are facing similar challenges.

I told them that if they were willing to surrender to the downsides of an immediate life annuity, they could buy one with the money they had and retire right away.

They understood this wouldn’t let them leave an inheritance to their kids. But it would let them retire without working another five years. They accepted the trade-off and bought the annuity.

If you’re shopping for an annuity, it pays to do your homework thoroughly, because your purchase will shape your financial future. A handful of variables help determine how much monthly income you’ll get. These include: