Annuties after retirement?

My 70 year old parents just sold their home and moved into a retirement community. Should they turn their sales income into an annuity? Would it be better to setup an annuity for each parent?

Key Phrases: 

Couple of short answers to a pretty large question: a) your parents should absolutely not consider an annuity if the pitch came to them purely in light of the fact that they just sold their home and are sitting on some liquid resources, and; b) if an annuity is appropriate, then it completely depends on many other aspects of their financial situation.

The first thing to think about before any specific products or solutions is developing a financial plan for your parents. They need to think about their retirement income picture in light of other sources that may be available to them. For example (the following, by the way, are just questions to think about and potentially share with a financial advisor--not intended to be shared online):

a) what are their monthly income requirements? The mortgage is gone, but it sounds like they will have new fixed payments for the retirement community. What are the new, base living expenses?

b) how much of the above is covered by social security?

c) do they have any other sources of pension income such as a defined benefit pension plan through a previous employer?

d) what other assets do they have in addition to the funds from the home sale?

e) do they have long-term care insurance?

f) how is their health overall?

g) do they have an estate plan? Have they thought about what they may want to leave as an inheritance to children?

h) do they travel or "recreate" quite a bit? what do their expenses look like above and beyond the "basics?"

In a nutshell, it is virtually impossible to tell how and whether an annuity might be useful for your parents without first considering the larger financial planning picture. The home sale definitely changes that picture, but all the pieces described above must be considered together rather than in isolation.

Your parents should be very careful and deliberate about the decisions they make at this point. No need to rush into anything. They should first consult with a financial advisor--ideally someone with expertise in retirement planning and retirement income planning--before making any decisions.

As for the sale of a home and the potential investing of the proceeds into an annuity, the real issues that need to be considered are:

--How do the couple feel about risk, investing, markets, etc..........
--How much of their fixed expenses are currently covered by social security, etc.......
--What is the liquidity of the couples assets in general. If a desired or required expense arises, is there sufficient liquidity of the assets to cover the expense.

If the couple wishes to invest in the market, but establish a baseline upon which they can draw a percentage of income against for the rest of both of their lives, then a variable annuity might be a suitable option. As for buying an annuity for both parents.........That would not be needed, as most contracts allow for structuring in a way where both parents would receive the potential lifetime benefits under one contract.