Keep The Money Flowing
It's okay to dig deep -- but not too deep -- into your retirement stash.
By Mary Beth Franklin, Senior Editor
From Kiplinger's Personal Finance magazine, October 2004
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Guaranteed income
When you buy an immediate annuity, you give a lump sum to an insurance company in exchange for the promise of guaranteed income for a certain period -- say, ten or 20 years -- or for the rest of your life. There are drawbacks. Buying an annuity is an irreversible decision. If you buy lifetime income and die prematurely, the insurance company keeps the money. In addition, today's historically low interest rates mean buying a fixed-rate annuity now locks you in to below-average returns.
One option is to follow Sunderland's example and buy a fixed immediate annuity for a specific period of time, say ten years. It requires less money upfront than a lifetime annuity to guarantee the same monthly income. When that annuity expires, you can buy another one to replace it, taking advantage of the higher payout based on your older age and possibly higher interest rates. Or, if your other investments perform well, you may decide just to take annual withdrawals from your nest egg.
According to WebAnnuities, it would cost a 65-year-old man $100,000 to guarantee a monthly annuity payment of about $650 for the rest of his life but less than $67,000 to generate that same income for ten years. At age 75, that same $100,000 at today's interest rates would buy a monthly lifetime annuity of about $890. Another option is to pair a fixed immediate annuity, which creates a guaranteed base income, with a variable immediate annuity, the payout from which can rise or fall along with the markets. That's what Abigail Fearon of Madison, Conn., did after retiring from Yale's financial-administration offices last year. Fearon, 69, worked past 65 so she could pay off her mortgage, car loan and credit cards before she called it quits. In addition to cutting her cash-flow needs, the extra time on the job let her add to her retirement savings.
Although she knew she could count on social security and a small pension, Fearon wanted to make sure recurring costs for food, utilities, property taxes and insurance would be covered. So she bought two immediate annuities -- one fixed, one variable -- that provide about $22,500 of income a year.
With her income from a part-time job as a bookkeeper, she replaces 80% of her pre-retirement income. When she gives up her bookkeeping job next year, she plans to buy another annuity. In the meantime, the balance of her nest egg is invested in a diversified portfolio of mutual funds.
"I'm certainly not rich, but I think I'm in pretty good shape," says Fearon, who likes to spend hours working in her large garden and volunteering in her community. She hasn't done much traveling yet, but she plans to and is confident that she'll have enough money when the time comes.
Fearon's financial adviser, Robert Kreitler, of Raymond James Financial Services in New Haven, Conn., says he would never recommend an immediate annuity as an all-or-nothing approach to retirement income. But such an investment tool can serve as a useful component of a broader plan. "You can put more into stocks and be more aggressive when you know your cash-flow needs are covered by an immediate annuity," he says. "As more corporations drop out of the pension business and shift the responsibility to individuals, annuities act as a do-it-yourself pension for a do-it-yourself world."
--Research: Katy Marquardt
ADVICE FROM THE PROS
Help to Keep You on Track
Mutual fund companies, which are the repositories of billions of dollars of retirement money, are increasingly offering to help investors figure out how to draw down their nest eggs.
The new "Retirement Income Advantage" program at Fidelity Investments provides free guidance on how much you can afford to spend each year in retirement and advice on how to structure your portfolio with long-term investments for growth and short-term investments for income. Call 800-343-3548 for a personal consultation. Existing Fidelity customers can also try out the sophisticated retirement-income tool on the company's Web site (www.fidelity.com).
For a one-time fee of $500, T. Rowe Price (www.troweprice.com) will manage your retirement investments and income. Included are annual reviews and ongoing advice, such as tapping taxable assets first so that IRAs can keep growing tax-deferred as long as possible. The firm's online calculator (www3.troweprice.com/ric/RIC) will let you compare various will-the-money-last scenarios.
The "Lifetime Income Program" at Vanguard (www.vanguard.com) offers fixed, variable and combination immediate annuities to create a guaranteed stream of retirement income. Investors who roll over at least $250,000 receive a free comprehensive financial plan. All others pay from $500 to $1,500 for this one-time service.