The wrong place to find income for life

Ask Money Magazine's undercover financial planner a question. Send e-mails to: themole@moneymail.com.

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(Money Magazine) -- Question: My financial advisor informed me that I must do something or I will run out of money. I am a 74-year-old woman, in relative good health. I retired 13 years ago. I have about $83,000 in an IRA (have been receiving $450 a month from this account, less taxes). She advises a variable annuity with guaranteed income for life. Another advisor wants me to transfer the funds to him to invest in a long-term growth strategy.

My sons advise, trust no one with your money. So, what should I do?

The Mole's answer: You and your sons are right to be suspicious of both financial advisors. Both recommendations give me hives! They have one thing in common though, they generate fees for the advisors. The $83 thousand you have can easily generate $450 a month for you. Let's explore the two advisor recommendations and then look at some better alternatives.

Variable Annuity: The flavor of annuity she is trying to sell you does provide guaranteed income for life and probably about $450 per month. At first glance, it seems pretty good considering you have some upside potential from market gains.

The problem is that these products, especially ones sold through advisors, have such high costs (typically 2 percent to 3 percent) that you are probably not going to see much of these gains. Your monthly payment will be flat and therefore, after inflation, you will have less and less to live on.

Long-term Growth: A long-term growth strategy is appropriate only if you don't need the money for some time. If you invest in a bear market and continue withdrawing the $450 per month, your portfolio will be drained before the market has time to recover. Avoid this recommendation like the plague.

It's important to note that keeping fees low will leave more income for you to live on. Therefore, consider going direct to one of the two possibilities below:

Fidelity Income Replacement Funds: These funds invest in a combination of stocks and bonds and are designed to provide monthly income. It's important to note, however, that income can either increase or decrease based on how the stock market performs. I personally like them because their costs are low at 0.65 percent annually, and they rebalance the portfolio based on when you need the money.

I looked at the 2022 fund which would provide you with $510 per month, either increasing or decreasing, for the next 15 years. It's currently 38 percent in the stock market though this will decrease each year. This will give you the potential to have your income increase faster than inflation.

With much lower fees than the annuity, you'll see a greater chance of increased income. The downside is that these funds have a set end date and your balance will be exhausted in 15 years. You will need other investments to fall back on.

Vanguard Lifetime Income Program: This is a fixed annuity that pays you income for the rest of your life. I'm not crazy about annuities in general, but this direct fixed immediate annuity lowers costs over those advisor-sold annuities.

An $83,000 investment for a 74-year-old female will pay about $656 per month for the rest of your life. So much for your current advisor telling you your portfolio wouldn't support the $450 monthly payout. You could also elect to have your current payment decreased to about $504 and get annual increases for inflation.

If you took half of your funds and put them in a Fidelity Income Replacement fund, and the other half into the non-inflation-adjusted Vanguard Program, you'd have about $583 per month to live on, have some potential for growth, and still have some income after 15 years.

You could also reduce the total invested amount to about $65,000 to provide the $450 per month, and then invest the other $18,000 into a diversified index fund which will give you some protection for both inflation and outliving your money.

Trust no one blindly with your money, but eventually trust someone enough to listen so you can evaluate it for yourself. Whichever solution you select, remember the motivations of those selling you products, and that keeping fees low is a requirement of providing you the highest income for life.

Ask Money Magazine's undercover financial planner a question. Send e-mails to: themole@moneymail.com.