Conserving those nest eggs


Your Money

September 26, 2006

Most of us will face two big retirement questions: Do we have enough money to quit working? And what do we do with it once we retire?

Two readers dealing with these issues recently e-mailed for advice.

The supersaver

One is a supersaver wanting to find out when he can jump off the corporate treadmill. The other seeks a guaranteed income in retirement but has doubts about the vehicle being pitched to him.

In the first case, Joe of Chesapeake Beach in Calvert County dreams of leaving the "corporate rat race" at age 60 and trying something new, like substitute teaching. Anything that doesn't involve sales quotas. "I love working," the 52-year-old says. "I'm tired of quotas."

Joe's 401(k), outside investments and company benefits total $905,000. He saves $50,000 a year. His mortgage will be paid off in seven years, and he has no credit-card debt. His employer will supply medical benefits in retirement.

Can he retire on his timetable?

His ability to save $50,000 a year is a huge asset, says financial planner Gordon Bernhardt of Bernhardt Wealth Management in McLean, Va.

Bernhardt crunched the numbers based on a 60-40 stock-bond portfolio. He figures Joe's nest egg could grow to $1.3 million to $2.2 million depending on weak or average market returns in the next eight years.

To reduce the chance of running out of money, no more than 4 percent should be withdrawn from the nest egg in the first year of retirement, Bernhardt says. Withdrawals can be tweaked in later years depending on the portfolio's performance, the planner says.

That would give Joe $52,000 to $88,000 a year in income, not counting Social Security and any money from a new job. Joe says that's more than enough for him.

But Bernhardt says Joe has other retirement issues to consider: long-term care insurance, setting up a cash reserve for emergencies and creating a diversified portfolio.

The other case is 63-year-old Henry, of Baltimore, who will retire next year with $900,000. He figures starting out he will need $3,200 a month for living expenses on top of Social Security.

Two financial planners suggested he buy a variable annuity, where his money would be invested in stocks and bonds. He's hesitating.

"I don't want to worry about the stock market every day," he writes. "Everything I read about a VA brings up red flags!"

Different solution

He's right to be cautious. By buying a variable annuity he doesn't avoid market risk, and the fees and sales commissions can be exorbitant, experts say. "It's one of the most lucrative products that people can sell," says Jim Ludwick, a planner with MainStreet Financial Planning in Odenton.

But Henry's solution might be another type of annuity: an immediate fixed annuity, says Peg Downey, a financial planner with Money Plans in Silver Spring.

This annuity would immediately begin paying out monthly benefits and guarantee an income for life, similar to a traditional pension. And Henry won't have to worry about the stock market.

Downey priced annuities and found that for $470,000 Henry could buy an immediate annuity that would provide $3,200 a month for life, regardless of how long that is. He could pay more to have his payments increase with inflation. For an additional $90,000, the annuity would continue to pay monthly benefits to his wife if he died first, she says.

Downey advises that Henry shop around for an immediate annuity among low-cost providers.

The remainder of Henry's nest egg can be invested in low-cost stock and bond index funds, Downey says. This pot of money can be used for vacations or other costs, such as medical bills, that might crop up later.

Another alternative is for Henry to turn his savings over to a professional money manager to produce an income stream for him, Ludwick says.

Planners recommend that Henry find an adviser to provide objective advice on retirement and handling his sizable nest egg.

"It's a lot of money and it's the rest of his life," Downey says.

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