Financial Advice Q&A

Occasional Visitor
Posts: 1
Should I purchase an annuity with my IRA or take withdrawals as needed?
[ Edited ]

I'm looking to withdraw from my traditional IRA when I am 59 and a half, which will be in 5 months. In the meantime I'm investigating options. My investment in my IRA is very modest, about $34,000. I have a military retirement, and am looking toward drawing early social security. What would be the benefits of an annuity? Or, would it be best to withdraw what I need for only a year at a time?

Other Answers: 1
Community Manager
Posts: 888

To annuitize or not to annuitize...that is the question (or at least that is this question).


To clarify a potential point of confusion for readers right up front, what you're considering is more specifically referred to as an immediate annuity - one that would begin an immediate payout in exchange for your lump sum - rather than some type of fixed or variable deferred annuity. Consequently, I'll formulate my response from that perspective. Before I give you my opinion though, I think it's helpful to frame the issue.


Predictable cash flow versus greater flexibility

Essentially, what you've got here is a decision between using your money to provide you with a set amount of predictable cash flow each month, or using your money in a way that gives you flexibility to use it when and how you see fit.  The interesting thing about this decision is that it's kind of a lightning rod for controversy in financial planning circles.  


Predictable cash flow

Some advisors (including me and my colleagues at USAA) would say that you should try to have all of your fixed expenses in retirement covered by fixed income sources like Social Security, military retirement, and individually purchased annuities.  The thinking is, since you know you're going to need to spend a certain amount of money each month, you should have at least that amount coming in.  Not setting yourself up in this way creates the possibility that at some point you'll use the money for another purpose and eventually won't be able to live the lifestyle to which you've become accustomed.  It's also argued that if you outlive the mortality tables used by the insurance companies who issue these contracts, you can actually continue to get money even though your initial purchase amount would have already been returned to you. That could potentially be a real positive given increasing life expectancies we've been experiencing in this country.


Greater flexibility

On the other side of the coin, there's the greater flexibility camp.  Their argument would be, "don't tie your money up and lose access to it for the rest of your life...maintain flexibility instead."  The underlying thinking being that it's difficult to predict years into the future just what you'll need financially and if you commit to the income stream then later decide you shouldn't have, it's too late. This camp's further argument against the annuity is that the people and companies selling these products tend to make a lot of money when you purchase them so there could be a conflict of interest lurking in the recommendations.


Your call

In the end, you'll have to decide for yourself which approach is right for your particular situation.  This certainly isn't a one size fits all decision.  As you consider it though, one thing to keep in mind is that in today's low interest rate environment, it's unlikely that you'll be able to generate much of a monthly income stream from an annuity the size of your IRA - even if doing so would be a prudent thing for you to do.


Thanks so much for your question.  I hope this helps and I wish you all the best!





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