DanMoisand

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Like any product, annuities have pros and cons. The type of annuity and exactly how the annuity is to be used goes a long way in determining if there are more pros than cons. Using an annuity in an IRA is a good example and part of this week’s featured question.

Q. Hello Dan, I have an IRA, will be 60 in a couple of months, and plan on retiring at 62 maybe 63. Is it better to leave that money in the IRA, shift it to my 401(k) at my current job which I would then have to spit out again in a couple or a few years or move some of it into an annuity, which my financial adviser is trying to sell me as a way to safeguard some of the money in the IRA for life? But I’ve read that the fees make an annuity less than optimal. I could not survive another stock crash like we experienced not that many years ago but would hate to miss out on the market continuing to climb. — Jeff

A. Jeff, as an accumulation vehicle, I am not a fan of annuities inside an IRA. People who get paid to sell annuities, often love them, usually touting various guarantees. Besides the added costs, you are restricting your investment choices to what the annuity offers and often limiting access to your funds when you don’t need to do so.

Annuities have a reputation as an expensive option because many are very expensive. The expensive ones get that way primarily from two sources.

First is distribution costs. I have heard it said annuities are sold, not bought. The sellers will be paid and those costs are built in to the annuity. Commissions tend to be higher than what would be paid for putting you in other products. This poses a conflict of interest.

There are annuity products that have stripped out these costs and are available free of commissions and surrender charges. To get advice on these contracts you either need to work directly with the company offering the annuity and do research yourself or work with a fee-only adviser. A fee-only adviser will need to be paid also but you should get more objective advice because the compensation isn’t based upon which product you buy. Find one through the Financial Planning Association (FPA) or the National Association of Personal Financial Advisors (NAPFA)

It is fitting you put the term financial adviser in quotes because often it has little meaning. I can’t tell if yours is a broker, a bank rep, an insurance agent, an investment adviser, or a combination of those. Nor can I tell to what extent he is or isn’t independent.

The second driver of costs is guarantees. Everyone would love to avoid losses yet not give up any upside. Such a situation is a fantasy. What you can find, however, is a balance between stability and growth potential. The guarantees in an annuity are designed to sound appealing but none of them are free. I’ve seen contracts with annual expenses exceeding 5% a year. Don’t buy an annuity without reading through the prospectus and a sample contract beforehand. An annuity is a contract between you and an insurance company and you have every right to thoroughly examine it before signing. If the salesman balks, you should walk.

Now, if your adviser is suggesting that you buy an immediate annuity rather than using a contract as an accumulation vehicle, that is a different animal. Immediate annuities tend to be less burdened by costs. An immediate annuity will pay you for a specific time frame or for life. The main trade off is that in exchange for the guarantee of lifetime payments, there will be less, if any, money available to your heirs. These can be attractive to persons with expected longevity, that cannot manage a lump sum, are in need of a steady base of cash flow, or whose heirs won’t need the money.

If an immediate annuity appeals to you, find out what annuity options may be available through your 401(k) and compare to what you can find privately. If the 401(k) has a competitive option, that would be a good reason to roll the IRA into the 401(k).

Q. How much can I draw out of the 401(k) investments (some is not taxable so wont count; it went post-tax) without paying tax on my Social Security. I understand the 401(k) is taxable. Not greedy just a good saver from the middle class. — Bob

A. If combined income is below $25,000 for an Individual filer or $32,000 for Joint filers, Social Security isn’t taxed. Combined income is Adjusted Gross Income + ½ Social Security benefits + nontaxable interest

Q. Dan, My wife turns 66 this year and I will be 65 this year. Neither of us have filed yet. I am the higher earner, still employed and my wife isn’t working. Can she file and collect spousal benefits on my account and then collect on her own at age 70? Can I file at age 66 and collect her spousal benefits and then collect on my own at age 70? I will most likely work a few years past 66. Thanks for your advice on how to maximize benefits. Thanks — D.J.

A. If either of you live into your mid-eighties, you will collect more by waiting as long as possible (up to age 70) for you to collect your retirement benefits. She cannot get a spousal benefit until you file for your benefits but she doesn’t have to wait until you are 70. When you turn 66 (your full retirement age, FRA), you can file and suspend. She will get half your age 66 benefit but your benefit will earn delayed credits until you are 70 or lift the suspension.

At your FRA, you can get a spousal benefit of half her age 66 retirement benefit, and still earn delayed credits on your retirement to age 70, by filing a restricted application. However, you cannot file and suspend and restrict your application at the same time so you will have to compare and choose.

Q. Dan, Thank you for your articles on all issues regarding retirement. My wife will be 66 this October. She started her Social Security @ 62. Her benefit in 2009 was $565 based on a full retirement benefit of $749. I have not yet started Social Security and I will be reaching my FRA on April 2015 with a monthly benefit of $2,274. I am planning to start my Social Security in 2017. Does it make for sense for me to file and suspend so my wife can bump up to spousal benefit or should I file a restricted application and draw a benefit based on my wife’s record until I reach age 68? Thanks — Doug

Reader Questions

Reader questions on all things retirement answered Mondays and Fridays. If you have a question for Dan, please email him at: RetireQA@marketwatch.com

Dan Moisand’s comments are for informational purposes only and aren’t a substitute for personalized advice. Consult your adviser about what is best for you.