Lately I have had several retirees ask a similar question. They state I am a conservative, non risk taker and retired and what should I do in light of CD rates 1% or less. What can I do that does not place money at risk in the stock or bond markets?
One conservative choice that fits well for many retirees right now are getting Fixed Annuity with flexibility to change in the next few years. The rates on these deferred fixed annuities are between 1.75% and 3+% depending on several factors. The way this would work for now is not to lock in income at this time rather to take “income only” at this time while rates are so low and later when rates increase as many expect then lock in the rates for life income or period certain income.
For example Mary has $100,000 and she is 71 year old. She could earn 2.5% or $2500 a year in interest and not touch the principal or do anything to harm her on the downside of the bond markets. The 2.5% would be a locked in rate not to get reduced for the life of the contract. Let’s say 4 years from now when she is 75 and assume rates are higher she could convert the annuity to either a cash flow for a number of years like 10 years or she could set up a lifetime income. A few years ago many retirees age 75 were electing life incomes and getting lifetime cash flow over 10% and most of that was tax free under the provision called exclusion ratio. Today with rates lower that is not currently possible but could be in the next few years.
I like to ask this question of retirees or those getting ready to retire why they set aside money into the 401K or IRA or other investments earmarked for retirement? The top reason is to have cash flow and security in later years when I no longer work. So do not be afraid of taking income and even getting it guaranteed for life if that is appropriate for your situation. Turning on the cash flow utilizing an annuity is like having a portion of your funds in your own private pension account.
While all of this may sound good there are important disclosures to consider. Get clear on potential liquidity loss or costs that need to be carefully discussed. I recommend you sleep on any decision over night and not to rush into any of these important decisions.