Invest for the rest of your life

Walter Updegrave is a senior editor with Money Magazine and is the author of "How to Retire Rich in a Totally Changed World: Why You're Not in Kansas Anymore" (Three Rivers Press 2005).

Ultimate Guide to Retirement

• Getting started
• 401(k)s & company plans
• Investing
• Annuities
• IRAs
• Self-employment plans
• Pensions and benefit plans
• Social Security
• Insurance
• Estate planning
• Living in retirement
• Getting help

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NEW YORK (Money) -- Question: I'm a 56-year-old teacher and my husband recently passed away. I don't own a home or have a pension or any investments, but I will receive a considerable sum from my husband's life insurance policy. My question is how should I invest this money? A financial adviser at my credit union wants me to put it into a variable annuity, but I've heard that this type of annuity is good only for the person selling it. What should I do? --Val, California

Answer: You're looking at your situation as if you're dealing only with an investing issue. And, I suspect, that's how the adviser at your credit union is viewing it too (and perhaps as a sales opportunity as well).

But as important as it is that you invest this money properly, that task is part of a larger goal. And you really need to take a step back and focus on your eventual aim here. Although you haven't stated it explicitly, it would appear you ultimately want to assure that you'll have adequate income to support you when you retire.

So the question you need to answer isn't just how to invest these life insurance proceeds. It's what steps should you be taking now to increase your odds of having a secure and comfortable retirement?

That means you'll have to start thinking about issues such as how much income you'll need to maintain an adequate standard of living once you retire and whether you can expect the resources available to you (which appears to be Social Security and the proceeds from your husband's life insurance) to generate the amount you need.

If the income your resources can generate falls below what you require, then you can look into ways to bridge the gap. The measures might include working a few more years, during which you can save for retirement, and postponing collecting Social Security, which can increase the size of your monthly check.

The point is, though, that you can't look at investing options in a vacuum. How you decide to invest the proceeds of your husband's life insurance policy will depend on factors such as how well prepared you are for retirement, how heavily you'll be relying on those funds to generate current income and how large a stash you might want to set aside as a liquidity reserve you can tap for emergencies and to pay unexpected expenses.

There are some tools that people can use on their own to help develop what amounts to their retirement income plan. To see what you can expect from Social Security at different retirement ages, for example, you can go to the Social Security Estimator tool. T. Rowe Price's Retirement Income Calculator can help you gauge whether you're on track to be able to retire at a given age. And Fidelity's Retirement Income Planner has a nice interactive budgeting tool that can help you develop a retirement budget.

This process can be daunting, though, which is why many people turn to advisers for help. That's fine. But if the adviser is going to truly advise, then it seems to me that he or she must first spend some time getting to know your financial situation and your needs. In short, the adviser should take you through the process I described above. Without doing that, it's hard for me to see how an adviser would know what sort of investment is appropriate for you.

So if the adviser you're now dealing with hasn't gone through this sort of analysis with you, then you ought to consider one who will. You can search for financial planners in your area here and here.

I purposely didn't want to turn this column into a yea or nay about variable annuities because they shouldn't be the primary focus in your case. Before turning to investments, you should first sort out the other issues I outlined.

That said, I do have serious reservations about variable annuities that come with riders designed to pay income for life. When it comes to creating a reliable retirement income, I think a better way to go is to combine a diversified portfolio of mutual funds with another type of annuity (a fixed immediate annuity).

Which is why it's all the more essential that you find an adviser who's willing to consider a variety of investments to get you the income, security and cash reserves you'll need in retirement, rather than one who sees a single investment as the answer to all your needs.