Fine-tuning for retirement, a look at longevity insurance

Your Money

February 18, 2007|By Janet Kidd Stewart | Janet Kidd Stewart,Chicago Tribune

On a percentage ba- sis, 44 percent of our savings is in my profit sharing at work and my wife's pension. My profit sharing, which makes up most of the 44 percent, is invested mostly in bonds (90 percent), and the rest in preferred stock that is beyond our control.

The rest of our investments are made up of individual retirement accounts - traditional and Roth - and my wife's 403(b). Of that, 38 percent is in large-cap funds, 31 percent is in small- and mid-caps funds, 26 percent in international funds and 5 percent in bond funds.

Would we be correct in assuming, because so much of our retirement investments are in safe vehicles, we can be more aggressive with the investments we control? Could you suggest a better way to allocate our controllable investments?

- George and Toni Selsky

You are correct in trying to allocate your controllable investments in concert with pensions and workplace plans that are heavily bent toward fixed income, experts say.

Still, there are a couple of things to keep in mind. Your age and your investment time horizon need to be considered when you calculate how much stock exposure you have overall. And if you haven't retired, remember that a profit-sharing plan isn't the same thing as a traditional pension.

"If this couple is within 10 years or so of retirement, they're not too far off," said John Scherer, a financial planner and principal with Trinity Financial Planning in Madison, Wis. Much further away or closer to retirement, and you could be taking too little or too much risk in the investments you control, he said.

As for the allocation of that money, Scherer suggested the following: Put some money toward emerging markets and real estate investment trusts. Then put twice that amount in international stocks and U.S. small-cap stocks, and four times the initial amount in U.S. large-cap stocks.

As for the profit-sharing plan, if you're retired and were vested in the plan, it is generally fine to regard this money like a rock-solid bond in your portfolio, said David Wray, president of the Profit Sharing/401k Council of America in Chicago.

If you haven't retired, remember that profit-sharing contributions are typically at the discretion of the employer and not a guaranteed amount each year.

In addition, Wray said, defined-benefit pensions are subject to payout limits if the employer ends up in bankruptcy court and regulators take over the plan.

A concern among retirees is outliving their retirement savings. Financial planners perform simulations projecting the age when retirement money will run out, resulting in probabilities that retirement money will last until certain ages.

Is there a "longevity insurance" product offered that would put certainty into not outliving your retirement savings? The longevity insurance would pay nothing until the start age, then pay out benefits until death. Additionally, the insurance would pay nothing if the insured person dies before the benefit start date. (This feature would reduce the cost of the product versus a standard annuity, given that the insurance company may never have to pay out a benefit.)

- Jack Neale, LaGrange, Ill.

Yes, there are products marketed as longevity insurance. Metropolitan Life Insurance Co. introduced a product by that name in 2004, and a handful of other carriers offer similar lines. They basically are a new version of a fixed deferred annuity, an income stream that kicks in years after you buy the policy. In very general terms, the upside is that you'll get a guaranteed income for life that may pay at a higher rate than immediate annuities.

The downside is you may die before you start collecting the payouts, in which case you've given up a chunk of your nest egg that your heirs won't collect.

If you're thinking about annuitizing a portion of your portfolio, you also might take a look at more traditional products to see what makes sense for you. One worth exploring is an annuity launched this month in a joint marketing effort between AARP and New York Life Insurance Co.

The AARP Lifetime Income Program is an immediate annuity for the organization's members between the ages of 50 and 85 that offers a cash-back feature for heirs.

If the insured dies before receiving benefits equal to the invested premium, the heirs can collect the difference, New York Life officials said.

The annuity is available in 44 states and the District of Columbia, and approval for the remaining six states, including Maryland, is expected soon, a New York Life spokesman said. For more information, go to www.lifetimeincome.nylaarp.com.

Have a retirement question? Write to yourmoney@tribune.com, or via mail at Your Money, Chicago Tribune, Room 400, 435 N. Michigan Ave., Chicago, IL 60611. If your letter is selected we may include you and your question in a future column.

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