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Should you put some of your retirement savings into an annuity?

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NEW YORK — I’m retired and have about 40% of my nest egg in stocks and 60% in bonds. I’m wary of the stock market, so I’m considering moving part of my savings into an annuity. Do you think that’s a good idea? –A.G.

It depends on what your goal is. If you’re primarily interested in making sure the value of your nest egg doesn’t get hammered if the recent rally in stock prices gives way to a sharp selloff — a reasonable concern given the age of this bull market and all the uncertainty surrounding a new administration coming into the White House — then I’d say there are easier ways to deal with that issue. You can simply sell off some of your stock holdings and use the proceeds to build up your position in bonds or bulk up your cash reserves or do both.

That’s not to say that devoting some of your money to an annuity can’t also offer some shelter from the vagaries of the stock market. But annuities also have downsides. For example, some come laden with onerous fees that cut into their returns over the long term, while others may charge penalties if you want to get at your money, some may not allow you access to your funds at all and still others are just so damn complicated. So if protection from the ups and downs of the market is mostly what you’re seeking, I’d say you should first consider moving to a more conservative mix of stocks, bonds and cash.

If, on the other hand, your goal is to have more guaranteed income than Social Security alone will provide — income you can count on collecting the rest of your life no matter what’s going on in the financial markets — then you may want to consider devoting a portion your retirement savings to an annuity, specifically an immediate annuity.

Although some annuities can be mind-numbingly complex, an immediate annuity is pretty straightforward. You turn over a lump sum to an insurer and in return you receive a monthly payment as long as you live. (If you’re investing money with a tax-advantaged account like a 401(k) or IRA, you’ll want to make sure you also hold the annuity inside that account or within a rollover IRA.)

The amount of income you’ll get each month depends for the most part on your age and the level of interest rates. Currently, a 65-year-old man who puts $100,000 into an immediate annuity would receive about $545 a month for life, while a woman the same age would get about $505 monthly. A 65-year-old couple (man and woman) would receive payments of roughly $450 a month as long as either one is alive. (To see what size payment you might receive, you can check out this annuity payment calculator.)

But (and there’s always a but) as alluring as that guaranteed-for-life income may be, it does come with a few hitches, the main one being that you’ll no longer have access to the money you’ve invested in the annuity. Which means it won’t be available for emergencies, unexpected expenses or to fund little splurges that your guaranteed monthly income can’t cover. That drawback doesn’t have to be a deal killer, though, as long as you’re putting only a portion of your savings into the annuity and leaving the rest in a diversified portfolio of stocks, bonds and a cash reserve that can generate long-term growth as well as provide additional funds when needed.

So the key question when it comes to deciding whether you should put some of your savings into an annuity is this: Do you need additional guaranteed income? The best way to answer that question is to tally up your living expenses (which you can do with the help of BlackRock’s online budgeting worksheet) and see how much of your essential living expenses are covered by the guaranteed income you’re getting from Social Security and, if you’re fortunate enough to receive one, a company pension. (If you’re not currently collecting Social Security benefits, you can see how much you may qualify for at different ages by going to Social Security’s Retirement Estimator.)

If your monthly basic living expenses exceed the amount you’re already receiving from Social Security and any pension income, then you might consider using part of your nest egg to buy an immediate annuity to bridge all or some of that gap. You would then have the remainder of your savings to take care of any remaining essential expenses, as well as outlays for unanticipated expenses, emergencies and such.

But if Social Security and pension income, if any, will cover all or nearly all of your essential living expenses, then you can probably get by without an immediate annuity and rely on your portfolio of stock, bonds and a cash reserve to pay any additional living costs you may incur during retirement. That said, research also shows that retirees who have guaranteed pension-like income tend to be happier in retirement. So I suppose putting some savings into an annuity even if other sources of guaranteed income fund most or all of your regular living expenses could make sense if it gives you more peace of mind. But you don’t want to overdo it and limit your flexibility to deal with, say, high health care costs in retirement or other unanticipated expenses that might pop up.

Even if you do put some of your savings into an annuity, you’ll still have to decide how to invest the remainder of your savings. You’re clearly concerned that your current 40% stocks-60% bonds mix might be more than you could handle in the event of a stock market setback. Perhaps knowing that you’ll have that additional guaranteed income flowing in from the annuity even if the market drops will relieve some of your anxiety and make you feel more comfortable with that 40-60 mix.

Then again, maybe not. Theoretically, the fact that Social Security and your immediate annuity are maintaining their value even when stock prices drop should make market setbacks somewhat less frightening. But there’s ration and emotion, and perhaps you’ll focus mostly on the declining market value of your savings.

The point is that, whether you go with an annuity or not, you should probably re-evaluate your current stocks-bonds mix. The goal is to end up with a blend of stocks and bonds that will provide enough insulation from market routs that you won’t panic and sell your stock holdings, but isn’t so conservative that the lower returns you’ll earn raise the possibility of running through your savings prematurely. You can achieve that balance between downside protection and reasonable returns by completing this free risk tolerance-asset allocation questionnaire.

At the same time, though, you want to be sure that the stocks-bonds mix you arrive at doesn’t subject you to too big a risk of depleting your savings too soon. You can see how long your nest egg is likely to last by going to this retirement income calculator.

I’ve given you the broad brush strokes here on the pros and cons of annuities. If you’re still considering one, I recommend you check out these three questions you need to ask before buying an annuity as well as these five tips for choosing the best annuity for providing guaranteed income. It’s always a good idea to know what you’re getting into before you buy an investment. And that goes double for annuities.