Ask an Advisor: Should We Move Our Retirement Assets Into a Target Date Fund or an Annuity?

An advisor is weighing whether your retirement assets should be placed in a target date fund or an annuity. Your combined pension and Social Security income amounts to $8,400 per month, dropping to $6,730 upon the death of one partner. You have $1.6 million in a 401(k) with a low expense ratio of 0.12%, as well as $350,000 in Roths and a taxable brokerage account of $300,000.

You own your home free and clear. The questions to consider are if an annuity or a target date fund is better, whether the cost of a robo-advisor outweighs its benefits, and if a target date fund or robo-advisor is sufficient for managing your portfolio. Annuities are a form of insurance that protects against the risk of outliving your money.

Despite being a useful tool, in your case, the advisor believes you probably don't need one. You have a robust investment portfolio across different account types, which could provide tax-efficient management of income needs. Relying on your portfolio instead of purchasing an annuity appears to be a reasonable approach. Within tax-advantaged accounts, such as your IRA, the advisor deems there is little difference between robo-advisors and target date funds.

Both provide a well-diversified, managed portfolio at a lower cost. The advisor recommends picking a target date fund based on personal goals and risk tolerance rather than relying solely on your retirement year. Consideration should be given to the fact that target date funds change their asset allocation over time. Robo-advisors can be more efficient in taxable accounts due to tax-efficient rebalancing and tax-loss harvesting.

However, a financial advisor could potentially add significant value due to asset location and tax-efficient withdrawal strategies.