Money in the Middle

Sandwich Generation Talking About Money Up, Down and Across Generations

Lump sum or annuity: Is that the right retirement planning choice?

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Retirement Income Planning

Retirement income planning is tricky business.  You need to be able to see into the future, account for emergencies, gauge the future state of the economy and know what your investments/savings will be earning to generate income. In other words, you need a calculator and a crystal ball.

 With the baby boomer generation approaching retirement age, and more concern about how to make those dollars stretch a lifetime, there is increased interest in the choices people make with those retirement dollars.

 What role does your employer 401(k) plan have to provide you with  more options in making that money last a lifetime?

 That was the focus last week of a summit on retirement income last week sponsored by AARP, WISER and ASPPA.  A request for information from the government on the role of income annuities in retirement plans (Dept. of Labor and Treasury) has sparked a lot of comments (800+). 

There were a couple interesting ideas that cropped up during the day.  Maybe they’ll help you think through your retirement plan.   

Thinking differently about your number…that big bucket of money you need in retirement.  The one depicted in the TV commercials with the guy carrying his number over his shoulder.  Big numbers, however, can be deceiving.  It may not last as long as you think if you have to take out too much each year to supplement your expenses (planners suggest no more than 3% -4% per year) or it may not grow as fast as you planned if there’s a downturn in the market or a recession.  We all know now how fast that bucket of money can disappear with economic dips. 

So rather than focusing on the big number, figure out how much that generates for you every month and plan backwards.  Figure out what you’ll receive in Social Security (your yearly benefit statement will tell you or use the benefit estimator at, add in your pension and any other guaranteed income.  Then figure out how much you need to fill the gap, for how long and you’ll be able to determine how big that bucket needs to be.  Or how much you need to scale back your retirement plans or work longer.   

It’s a different view– and for some a more manageable way to look at how much you need in savings to live the lifestyle you want in retirement.  You’ll probably be seeing more tools from your 401(k) plan to help you figure this out. But this does require getting comfortable with what’s in your budget – a task many of us prefer to put off. 

Trial annuities. While annuities have their rightful place in retirement planning since they can guarantee income for as long as you live, their not a consumer favorite.  For many of us it’s hard to trade guarantees for the hope and possibility that our money can grow really big, making us rich in retirement. Because once you turn on an annuity (annuitize) there’s no turning back, and when it comes to money most of us like options.

Of course, the other side of that is what happens if you invest incorrectly. 

So there is some talk about figuring out how to create a “trial annuity” from your 401(k) plan.  A test drive of sorts – try it for say, two years, see how it works, how you feel about receiving a monthly check . Like it: then turn your savings into an annuity.  Don’t like it: go on with Plan B.  The devil is probably in the details, but a creative way of helping us better understand the value of guaranteed income for what could be a long life. 

Here’s one thing we know won’t happen – a return to defined benefit plans (fixed pensions).  Those days are gone.  It’s now up to us to figure out how to create our own pensions.


Written by Laura Rossman

May 26, 2010 at 8:18 pm

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