Retirement nears, consider income for life
A reader considers whether to annuitize his pension or take a lump sum.
By Walter Updegrave, MONEY Magazine senior editor

NEW YORK (MONEY) -- QUESTION: I'm planning to retire in about a year when I'm 62. My company pension plan offers me the option of taking a lump sum of about $775,000 or a monthly annuity payment of $3,600 that would go to me or my wife as long as either of us is still alive. I also have another $500,000 invested in a 401(k) and in IRAs. I'm undecided about whether to take the lump sum or the annuity. I'm also wondering whether I could get a higher monthly payment if I took the $775,000 lump sum and bought an income annuity. I'd appreciate your advice on this.

-- Victor Listrani, Boca Raton, FL

ANSWER: First, let me say it's smart of you to begin thinking about your options well in advance of retirement. Sometimes people don't consider how they'll take their retirement benefits until they're half-way out the door, and that can lead to rushed decisions that they may regret later.

Ideally, you want to have a combination of assured pension income as well as money set aside in investments that you can tap for regular income and for splurges and unanticipated expenses, or, if you wish, to leave a legacy for your heirs.

By having both you not only have more financial flexibility to navigate retirement, you're also likely to have a more satisfying retirement. Research shows that retirees with guaranteed incomes are generally more happy than those who have only 401(k)s, IRAs or other investments - and that those who have both are the happiest of all. (See a recent column I did on how to achieve a happier retirement.)

It seems that you're in a pretty good situation here. You'll have Social Security as one source of guaranteed lifetime income (one that's inflation-adjusted to boot), plus you've got a nice pool of assets in IRAs and 401(k)s.

The question is do you want to use that company pension to generate a lifetime income for you and your wife, and, if so, how much of it?

For the reasons I mentioned above, I think it's a good idea to have a some guaranteed income on top of your Social Security payments. But I'm not sure it would make sense to take all your $775,000 in the form of an income annuity. In effect, you would be devoting more than half the value of your retirement resources to income, leaving just the five hundred grand in your control. Since you're retiring at 62, and thus may be around a good 30 years or longer, I think you want to have a bit more money invested for long-term growth so your purchasing power doesn't decline over the course of a long retirement.

So here's what I think might work best in your case. Consider taking the $775,000 in a lump sum, and be sure to transfer that money into an IRA rollover so it's not taxed. Once the money is sitting in the IRA, you can then consider "annuitizing" part of it - that is, using a portion of it to buy an income annuity that is also kept within an IRA. (In other words, you don't want to pull the money out of the IRA and then buy the annuity, since that would trigger taxes, leaving you with less money for the annuity.)

Before you do this, however, you want to see how the annuity payment you can get from a private insurer stacks up against what your company is offering. That's easy enough to do by going to a site such as You just plug in information such as your age, the age of your spouse, the amount of money you want to convert to an annuity and, voila! You'll get a monthly payment figure based on average quotes from 16 insurers. You can then begin getting individual quotes from specific companies, including ones not included in the figure, such as Vanguard and Fidelity.

You didn't provide your wife's age, but if your spouse two years younger than you, and you converted your entire $775,000 to a "joint lifetime income annuity with 100% to the survivor," you could receive about $4,295 a month.

You could match your company's offer of $3,600 of monthly lifetime income by putting about $650,000 in an annuity. That would leave you with $125,000 that you could invest.

Ultimately, you'll have to decide how large a pool of assets you need to feel comfortable in retirement. But by rolling over your lump sum rather than taking the annuity payment from your employer at least you have the option of deciding how you want to divvy up that money.

By the way, you should consider annuitizing in several steps. The reason is that the annuity payment you receive largely depends on the level of interest rates at the time you buy the annuity. So if you annuitize all your money in one fell swoop, you're taking a big bet on interest rates. By annuitizing, say, a portion one year and then the remainder over the next couple of years, you protect yourself against the possibility of buying an annuity when rates are unattractively low.

One final thing: be sure to go through this sort of analysis again right at the time you're ready to retire. Annuity rates change all the time, so you want to be sure your evaluation is based on the most current rates being offered both by your company and the insurers.


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