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retirement

Maximize Your Income in Retirement

A quirk in employer pension formulas gives women a big advantage.

Like everyone on the verge of retirement, I have one major concern: income. As a woman on the verge of retirement, I have another major concern: longevity. It's possible that I'll live into my mid eighties or even longer -- my mother passed away at 90. So how should I, and other women, plan on financing 20 to 30 years of retirement?

First off, add up how much you need to cover your expenses. "When I ask clients this question, they just laugh," says Dawn Doebler, cofounder of Her Wealth, an initiative of Bridgewater Wealth & Financial Management in Bethesda, Md. "It's shocking how many people don't know how much they're spending." Yet that's crucial information because your top priority is to ensure a steady stream of income that covers your basic living costs.

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Women who are covered by an employer pension have a big advantage. Not only can you count on a regular payout, but chances are you’ll also get more than if you were to take a lump sum and use it to buy an annuity from an insurance company. That's because pension plans use gender-neutral calculations, which work in favor of women, says Mark Cortazzo, senior partner at Macro Consulting Group, in Parsippany, N.J. "Women would likely have to pay more than men to generate the same income with an annuity because they live longer," says Cortazzo.

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Say a 65-year-old man wanted to buy an annuity that paid $50,000 a year for life. One major insurer would charge a single premium of about $781,000 for such a policy. But it would cost a 65-year-old woman about $822,000 -- or roughly $40,000 more -- to get the same $50,000 each year.

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What if you have a choice between taking a pension or investing a lump sum? Investing the lump sum could make sense in certain circumstances -- say, you don't expect to outlive your husband, you have income from other sources, or you want to leave a legacy. But you're taking a big risk if you're depending on your investments to cover your basic expenses, especially if the stock market tanks. And you may already have to manage money in an IRA or a 401(k).

Social Security benefits can help cover basic expenses, but you may want to hold off claiming benefits until age 70 to maximize your monthly payments. If you make the most of Social Security, a pension and other assets, "that's the trifecta," says Cortazzo.

Advice for couples. If you're married, make sure you're the beneficiary of your husband's retirement accounts. If he has a traditional pension, you're entitled by law to a survivor benefit, which reduces the benefit your husband receives during his lifetime. Couples are sometimes tempted to take the higher amount even if it ends with the husband's death. But unless you're counting on dying before your husband, it rarely makes sense to give up your right to income for life.

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Couples can sometimes increase their overall income by choosing to take the higher, single-life benefit and buying life insurance to protect the surviving spouse. Check the numbers carefully to make sure this option makes sense.

You can maximize your Social Security survivor benefit if your husband waits until age 70 to file for benefits and qualifies for delayed-retirement credits and a higher payout. But be careful, lest you have the same experience as Judy Rubin, a partner with Plaza Advisory Group, in St. Louis. When Rubin's husband turned 70 and applied for benefits, "Social Security encouraged him to take a lump sum and forfeit the larger monthly payment," says Rubin. "I'm 10 years younger than he is, and the lower payment would have meant a lower survivor benefit for me."

Once you're making the most of your retirement income, be careful not to give it away -- to pay for your grandchildren's college or some other worthy cause -- at least until you know you're on firm financial ground. "The first year and a half is the craziest," says Rubin.

I'll let you know how my own retirement unfolds.

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