Consider alternatives to annuities in retirement years

Q I am near retirement. I will receive a small pension in addition to Social Security. The two checks will total about 70 percent of my pre-retirement take home pay. To compensate for some of the 30 percent drop-off in pay, I'm thinking of buying an annuity. What type of annuity should I purchase? Should I buy it from an insurance company, a bank, or elsewhere? Does an annuity make sense for me?

J.M., New York

A If you go the annuity route, buy an immediate annuity that makes payments as soon as possible, says Tim Shmidl, a financial consultant with Prism Financial Group, in Overland Park, Kan.

He recommends that the annuity come with a guaranteed payout over a fixed period (such as 10 years). That way, if you pass on prematurely, your beneficiary will get something from the plan. The annuity should also have a payment guaranteed for your lifetime.

Whoever sells you an annuity will have to buy the contract from an insurance company, Mr. Shmidl says. So be sure you review the insurer's financial rating. The higher the rating, such as AAA, the better, he says.

The problem with an annuity, Shmidl says, is that you are "turning your assets entirely over to someone else." Instead, he recommends you consider managing the money yourself. "Set up a balanced account, using both stock and bond products, and aim for a return of at least 8 percent. That will beat the returns of most fixed-rate annuities." Use the interest stream, leaving the principal intact, he says.

By managing your own money, you retain control, can achieve potentially higher earnings, and get at the principal without penalty if there is an emergency, he adds.

Q Last year I put $1,000 into an IRA and deducted that amount from my taxable income. I could have deducted as much as $2,000, but I didn't have an extra $1,000 to deposit. Now I've got it. Can I deduct $3,000 for this year's IRA contribution?

A.R., Los Angeles

A Sorry, According to the Internal Revenue Service, there is no carry-over allowance on IRA contributions. So this year, you can only deduct up to $2,000.

Q I would like to start a dividend-reinvestment plan but I can't afford to reinvest all of my dividends each month. I will need to take out some of the dividend money in cash. Is this possible?

M.F., Seattle

A Sure. Look for dividend reinvestment plans (DRIPs) offering partial reinvestment. Many companies, including General Motors, Johnson Controls, and PepsiCo, will let you take a portion of the dividend in cash, while reinvesting the rest.

For a listing of DRIPs, try www.netstockdirect.com. For information on companies with partial-reinvestment options, contact Evergreen Enterprises (301-549-3939). Their directory costs $37.95, including shipping.

Questions about finances? Write:

Guy Halverson, The Christian Science Monitor, 500 Fifth Ave., Suite 1845, New York, NY 10110

E-mail: halversong@csps.com

(c) Copyright 2000. The Christian Science Publishing Society

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