No magic answer to retirement-income shortfall

For seniors, an annuity can be an appealing source of income, but it also raises questions.

This advice is from Sacramento, Calif., investment adviser Michael R. Tate and estate-planning lawyer Tracy M. Potts.

Question: My husband died in November and I only have his Social Security income, plus $250,000 in insurance money that I want to invest. To supplement the Social Security, I need about $2,500 more a month in income. With the market as changeable as it has been and interest rates so low, I can't figure out where is safest to invest. I cannot afford to lose a penny as it has to last as long as I will. I am 73.

What would you suggest? What do you think of an annuity?

Answer: These times can be very challenging emotionally, let alone layering on the challenges related to financial matters.

You raise a frequent question about the need for current income without risking principal. Your additional $2,500 per month equates to $30,000 per year, which would represent a withdrawal rate of 12 percent from the insurance proceeds in the first year. To make sure that money does not run out, you would need to generate in excess of a 12 percent return.

Unfortunately, generating any return at those levels from the stock market is nearly impossible, at least consistently. It would involve a high degree of volatility and risk of principal, which I would never recommend.

As for an annuity, look at some of the discount brokerage companies in order to avoid excessive commissions or long surrender charge periods that we typically see on these fixed-annuity options.

We strongly recommend doing a lot of research before committing to any type of investment.

For example, the Fidelity Investments' Web site had an annuity product - based on your age and investment of $250,000 - with guaranteed income of about $1,790 per month during your lifetime, with nothing going to your heirs.

These types of annuities have many options in how they are structured. You can choose payments that cover just your lifetime, that of you and your spouse, or you can receive income for a specific period of time. You can also protect your heirs with an option ensuring that beneficiaries receive income worth at least the purchase amount of the annuity. With each option, the payout from the annuity company will be different, which is why so much research and thought needs to go into the decision.

Unfortunately, the payout in the example above is less than your required monthly amount. Our best advice is to determine if you can dial back your lifestyle in any way to require less monthly income. That can be a difficult request.