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What to do with an annuity

Question: I retired in 2007 from a university. My retirement funds are with TIAA-CREF, split roughly in half in 2 annuities. One is a fixed annuity and the other is a variable annuity, balanced 50/50 between bond and stock funds. I probably lost 20-25% on that fund in the crash last year. The 2 annuities together provide about 40% of my monthly retirement income.

I have resisted freezing the variable annuity and making it fixed because that would provide NO chance to recoup some of my loss. When I set these up in the first place, the fixed annuity was my hedge against the kind of crash we suffered in the past year. I'm not feeling the pinch although my income dropped a little this year but income tax adjustments offset the loss--and I do a little consulting for "egg money." I also have a savings account equal to 1/3 my annual income. I rent, so as not to have house expenses.

Am I crazy to hold firm? If I look at a 20 year time horizon, isn't it likely that my annuity will slowly come back over time (and maybe I could fix it then)? I would be interested in Chris Farrell's opinion about this. Thank you. Elaine, New Berlin, WI

Answer: One reason why I'm posting your question is that I admire your retirement strategy. We can all learn from how you have thought through your finances and what you have done. You set up a smart hedge against a bad market environment. You have savings. You still have some earnings coming in. Your expenses are under control. As far as I am concerned, you've really come up with a sensible strategy for all seasons.

As to your question, I still like the idea of you keeping the hedge with the floating annuity. It allows you to participate in the good times. But your other savings buffer you against the bad times when they come again.

One other thought: I would hold off freezing the variable annuity until you had an answer to this question: How much of your portfolio do you want exposed to stocks, if any? Right now, it seems to me that you're mostly fixed income between the savings, the fixed annuity, Social Security and the 50% of the variable annuity that is in bonds. So, one issue for you is how much of your portfolio would you like exposed to stocks? More? Less? The same?

What do other people think?

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