We Have $1.2M in an IRA Plus $750K More. Should We Use a Target Date Fund or Annuity?

Core Insights - Annuities and target date funds are increasingly popular among retirees and those saving for retirement, with their suitability depending on individual financial goals and retirement stages [1] Annuities Overview - Annuities are income-oriented financial products purchased from insurance companies, providing a series of payments over time in exchange for an upfront investment [3] - The most common type for retirees is the lifetime annuity, which guarantees fixed monthly payments for life, offering security similar to private pension plans [4] Case Study: John and Susan - John and Susan, a hypothetical couple aged 67, have $1.2 million in a pre-tax IRA and $750,000 in taxable investments, along with $45,000 in annual Social Security benefits [2] - If they invest their entire $1.2 million IRA in an annuity, they could receive approximately $82,220 annually ($6,851 monthly) in pre-tax income from a single premium immediate annuity [5] - Selling their $750,000 portfolio after capital gains taxes would leave them with about $558,000, which could yield an additional $38,280 annually ($3,190 monthly) from another annuity [6] - Overall, their total annuity income could reach around $120,500 per year before taxes if they invest their total of $1.95 million in annuities [7] Considerations for Annuity Income - While annuities provide a steady income stream, they pose inflation risks as many are not indexed for inflation, potentially diminishing purchasing power over time [8]