I'm locked into a 10-year annuity and now I'm strapped for cash. What are my options?

By Beth Pinsker

A self-described 'spender' is concerned about taxes

It's important to have a mix of account types so that you have access to funds when you need money.

Dear Fix My Portfolio,

I'm 65 and currently in an annuity that will eventually reach the point where I can change investment strategies - it's a 10-year locked-in annuity that resets every year based on the performance of the S&P 500 SPX. I haven't been able to touch any of the investment, but it does pay me $2,000 a month. I'm wondering what investing direction I should move in now.

As far as the rest of my finances, it's bleak! Not much of an emergency fund (I'm a spender!) but there is some money in a brokerage account. I'm really concerned with the tax issue. I recently thought about purchasing a condo, but to use any of the annuity dollars, the taxes are really out there because it was purchased with pretax dollars.

Unconvinced on annuities

Dear Unconvinced,

When you're 65, 10 years is a long time to have the bulk of your nest egg locked up. Are you still going to want a condo when you're 75? A 30-year mortgage would put you over 100 by the time you'd pay it off.

When financial professionals preach diversification, it's not just about having a blend of stocks and bonds. You also want to have a mix of account types so that you have access to funds when you need money. Going all in on an annuity strategy with your pretax funds limits your options significantly, as you have found. That's because you're locking up all of your available assets in a guaranteed product from an insurance company that, in return, is paying you a monthly sum for 10 years.

Most people think of annuities as an all-in lifetime strategy. In retirement, some people buy an annuity with a lump-sum payment and then collect monthly sums for the rest of their lifespan. The type of investment you seem to have is generally called a multiyear guaranteed annuity (MYGA), and it's akin to a certificate of deposit from a bank or a Treasury product. It's designed to provide you a guaranteed return on your money for the specified time.

In your case, the time period is 10 years and the amount you get is tied to the S&P 500's return each year, but likely within parameters - capped to a certain amount on the positive side, and kept above zero on the negative side.

For a retiree looking for safety, MYGAs can be attractive. Jean Chatzky - author of the new book "The Forever Paycheck," which makes the case for setting up guaranteed retirement income - is considering these as a part of her own portfolio. She looks at it as a way to make sure the bulk of her living expenses are covered with money coming in monthly - but only about a quarter to a third of her total savings.

"I think what I'm going to buy is MYGAs - it's like a CD with an income rider," Chatzky told MarketWatch in a recent interview. The type she is looking at has the ability to delay the start of the monthly checks. "For every year I wait to collect the money, the income goes up by 8.5%."

The key point for her, though, is that MYGAs can be laddered, just like CDs and Treasurys. She can then control the intervals and make sure she has cash for large purchases if she wants it.

Maybe this is the piece you were missing when you first bought your annuity. You went all in for a 10-year product. What if you had split it up into different time periods? Then you'd have some money coming due soon, and you could have put that toward the down payment for a condo (or the full amount, if it was a large-enough sum).

The difference in risk between a MYGA and a lifetime annuity is that you have what is called reinvestment risk. When your MYGA comes due, you have to decide what to do with it next. Right now, interest rates are favorable for these types of insurance products - but a few years ago, when interest rates were at nearly 0%, they were not. What will they be in 10 years, or whenever you next have to decide how to deploy your money? That's anyone's guess.

The tax issue

The other problem you're trying to solve is taxes. Because you bought your annuity with pretax dollars, every dollar that comes out is taxable as a distribution. So that $2,000 a month adds up to $24,000 a year, which is taxed at your applicable income-tax rate. That will depend on if you have already started claiming Social Security, and what other income you have from capital gains in your brokerage account. If you're in the 12% bracket, which is likely, you're talking about somewhere below $3,000 in taxes on what you get currently.

You call yourself a spender, but maybe that's really just in the sense of spending all that you have coming in, rather than profligate luxury spending. That actually makes you a good candidate for an annuity - probably a lifetime one - because that money will never run out.

On the other hand, if you take out the money from the annuity at the end of the 10-year period and spend it on a condo, it will count as a distribution all in one year. That would be a large sum of money, would push you to a much higher tax rate and might impact your monthly Medicare charges. If you go over $109,000 for the year, you're going to pay an income-related surcharge called IRMAA. If you're taking Social Security already, you could also face higher taxes. And then what would you use for income to fund your regular expenses?

This may not seem like a very palatable plan to you. What might be more amenable is to take this time, while you are already locked into the annuity, to save up what you can from the monthly payments and put it toward building an emergency fund. At 65, you never know what's around the corner. That should be everyone's first goal when they are sorting out their finances.

Then, when you know the end date is coming on the annuity, think about your goals at that time. If you reinvest, seek out help at your financial institution or through an adviser to build a ladder of fixed-income investments with some of it - in whatever has the best rates at the time - and perhaps put some portion toward growth in index funds.

Whatever you get into next, make sure you understand it and think through all the ramifications for the period of time you're locked into it.

Got a question about retirement? Fill out our new questionnaire or write to me directly at beth.pinsker@marketwatch.com (please put "Fix My Portfolio" in the subject line).

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-Beth Pinsker

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09-13-26 1659ET