31 Aug Social Security isn’t enough. What to do?

Q. I’ve recently retired and I need to pull money from my investments to make ends meet because Social Security isn’t enough. A friend suggested I do an immediate annuity but I’m not sure. I need an additional $14,000 or so each year and I have $700,000 in my IRA.
— Retired

A. Congratulations on your retirement.

We’re not surprised Social Security isn’t enough to maintain your lifestyle, but the good news is that you’ve saved a nice nest egg.

It’s also smart to ask questions before you make any moves, and you have many options.

First, to the question of an immediate annuity.

With an immediate annuity you turn over a lump sum of assets in return for a monthly benefit, which could last the rest of your life if elected, said Abby Rosen, a certified financial planner with RegentAtlantic in Morristown.

There are a number of factors that determine what the monthly benefit would be.

One of them is what your age is upon starting the benefit, she said.

“The younger you are, the lower the benefit, due to the longer the insurance company will have to pay out benefits,” Rosen said.

Another factor is interest rates.

“The lower the interest rates, the lower the benefit,” Rosen said. “Interest rates today are still relatively low. Due to where current interest rates are, and the fact that you recently retired, I recommend against immediate annuities at this time.”

You can instead reconsider how you’re investing your IRA with income in mind.

Rosen said the investing part doesn’t have to be hard.

“The simplest approach to investing is owning one, highly diversified, low-cost fund you don’t have to manage,” she said. “With a $700,000 IRA, to make $14,000 per year, or $16,000 pre-tax, you need a return of about 2.25 percent.”

One of the benefits of investing is you retain total control over the IRA, Rosen said.

If there was an emergency and you needed more than $14,000 one year, you have access to the whole account, she said.

Another benefit is that once you pass away, your beneficiaries inherit what’s left in the account, she said.

The obvious con with investing is that nothing is guaranteed.

“There will be years when the IRA loses money,” she said. “The important thing is not to panic, but stick with the plan.”

Also remember that when you take a withdrawal from your IRA, it’s taxed as ordinary income.

There are other options, such as buying Certificates of Deposit (CDs).

This is less risky than investing in stocks and bonds, but it’s also unlikely to grow much or at all because of inflation, Rosen said.

“The idea here would be to `ladder,’ or buy multiple CDs with varying terms,” she said.

For example, you could purchase three different CDs, one six-month CD, one nine-month CD and one 12-month CD.

“As each CD matures, you purchase a new CD to replace it, living off the interest,” she said. “Given that interest rates are gradually rising, you would earn more interest as you buy new CDs with higher rates.”

She said you should consider purchasing the CDs at different banks to take full advantage of FDIC insurance.

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