I’m 65 and started saving at 23. Do I buy an annuity to protect against diminished Social Security?

“I will also have $2.5 million expected in post-tax cash from liquidating my business interests.” (Photo subject is a model.) - Getty Images/iStockphoto

Dear Quentin,

I started thinking about retirement about 42 years ago when I opened my first IRA at 23. Since then, I have had some good years and lean years. I am now within a year of retiring at 66. It strikes me that the “rule” of needing 80% of your income replaced by asset withdrawals doesn’t necessarily apply for high earners.

For the last six years, I have earned $1 million to $1.4 million annually, but have no ongoing need to spend even a quarter of that. I have $1.1 million in IRA/401(k) assets. I will also have $2.5 million expected from liquidating my business interests and $2.1 million in real-estate net equity ($550,000 in 4% mortgages on both of them), $275,000 of emergency cash and no debt.

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My wife has about $350,000 in 401(k)/IRA assets and $250,000 in taxable investments. We anticipate between $1 million and $1.5 million in additional inheritance within five years. In 2028 and 2029, I will have no earned income or Social Security. Social Security could kick in at 70, starting at $58,000 annually; my wife’s Social Security could start at 62 with $30,000.

Yes, I consider myself pretty lucky.

I will be comfortable spending $250,000 annually on more than $4 million in investments plus Social Security. Homes, insurance, travel, cars, taxes, and healthcare are the biggest anticipated expenses. I imagine between 40% and 70% equity allocation would be appropriate. I am considering a dual-life annuity for a fixed income substitute.

I also have other questions: 1) Do I pay off my 4% mortgages instead of investing my cash? 2) Do I play it safe and buy an annuity for maximum income (especially if Social Security is diminished)? 3) Do I defer 401(k) withdrawals to age 73 and hit my taxable accounts harder until then? Maybe I should start Social Security at 68 instead of 70? I hope to ensure sufficient income, inflation protection and a legacy for my children.

Somewhat Confident

Don’t miss: ‘Things are getting tougher’: I’m struggling with $145,000 in debt. Should I refinance my 3.5% mortgage?Spending $250,000 annually, even accounting for your combined $90,000 Social Security, is plausible. Your investments, accounting for inflation, would last just over two decades. - MarketWatch illustration

Dear Confident,

By investing in your 20s, you have earned riches without the embarrassment.

The answers to your questions — do you pay off your mortgage, get an annuity and defer 401(k) withdrawals until you’re 73? — lie in the laps of the gods. You’re asking the impossible. You are assuming that there is one answer that will suit your needs. The answers are based on your risk tolerance and needs. If in doubt, split the difference on your various options.

Story Continues

Paying off any mortgages versus waiting would depend on whether your investment returns fall below 4% after taxes. If not, it probably makes more sense to keep the mortgages, given that you already have a $275,000 emergency fund (which you should consider splitting between laddered CDs and more liquid high-yield investment accounts).

Here are your choices: 1) Maintain the status quo. 2) Pay off all your mortgages, which reduces your interest payments. 3) Pay off half of your mortgages and use that money to get potentially higher returns in the market (and save you $11,000 a year in interest alone). At a possible 7% return, you’d earn $19,250 per year on the stock market.

As for delaying your 401(k) and Social Security withdrawals, do it if you can afford to do it. And you can afford to delay. Starting Social Security later increases your benefits by 8% every year past your full retirement age until you reach 70. Delaying withdrawals from your 401(k) until you’re 73 also gives more breathing room for those investments to grow.

Social Security’s security has long been a matter of debate, and its future demise may be greatly exaggerated. The program’s trust fund is projected to run out by 2034, with 81% of benefits payable at that time. Some of the suggested remedies include raising the retirement age, changing Social Security’s annual cost-of-living adjustment and raising the payroll-tax rate. Still, it’s better not to rely on Social Security alone.

Considering an annuity

At 65, you should have at least 20 years to run the gamut.

That means the first thing you should do when you sell your business and get that expected $2.5 million is invest it. Spending $250,000 annually from your $4.1 million in investments, assuming you invest your inheritance and take your combined $90,000 Social Security into account, is plausible, if not conservative. Your investments, accounting for inflation, would last just over two decades.

The scenarios you lay out are all feasible. You could pay off some of your mortgage to lower your monthly payments, while preserving the rest for your investment income in retirement. Plus, you could take out a $1.5 million annuity, perhaps a dual-life immediate annuity that would pay you $100,000 for life; fair warning, it would have no adjustment for inflation.

With an immediate annuity, the owner makes a lump-sum payment and the insurance company makes regular income payments to an annuitant over a set period of time, or for annuitants’ lifetimes. Annuities get a bad rap, sometimes with good reason, and in part because of the aggressive sales tactics behind them. Check out Charles Schwab’s annuity calculator.

“These annuities are predictable and can enhance one’s retirement by providing a stable source of income after a retiree stops receiving a regular paycheck,” Navy Mutual says. “Further, they often offer higher interest rates on average than savings accounts or Certificates of Deposit, so owners may have a better chance of staying ahead of inflation.”

To pay for a dual-life annuity, you would probably need to fork out $1.5 million or more. That leaves you with roughly $2.6 million to invest over the course of your retirement, which does not include the $1 million to $1.5 million inheritance you are expecting over the coming years; it also does not include the possibility of selling one of your properties for additional income.

In the meantime, consider 529 tax-advantaged college plans for your grandchildren.

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Previous columns by Quentin Fottrell:

‘I have a great mortgage rate’: I need $80K to buy my husband out of our home. Do I raid my $180K Roth IRA?

‘I’m tired of corporate America’: My wife and I have $1.65 million. I’m 61. Can I retire already?

‘This scam stuff is going to get worse’: A man approached me in my car — he had a crazy story

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