Retirement

Q: What is the best vehicle for a steady income stream in retirement?



A: The best vehicle for the creation of an income stream in retirement will depend on your retirement source, tolerance for risk, desire for flexibility, life expectancy and your inheritance plans.

A "traditional" view of our sources of retirement income was a three-legged stool represented by:

• Pension income

• Social Security retirement benefit

• Personal retirement savings

Today, more workers have a 401(k) defined contribution plan and an IRA instead of a pension. While federal and state employees and a relative few corporate retirees will still enjoy all three legs, most are left with a pair of stilts: Social Security and personal retirement savings.

What is the status of your retirement stool? If you don't have a big pension but have managed to accumulate a substantial retirement nest egg, you can determine what, if any of that savings might be well spent on an immediate annuity. That answer will depend on your tolerance for risk, your desire for flexibility and your reasonably expected life-span.

If you have a higher-than-average tolerance for risk, you'll likely opt out of the annuity option. Instead, you can create your own stream of income with a balanced portfolio, including fixed income and stock exposure. That should outperform the annuity's rate of return, especially considering today's rock-bottom interest rates, upon which annuity streams are often based. After all, the insurance company seeks to take your money and invest it, making a higher rate of return than the rate they've promised to pay you.

If you have a low tolerance for risk, however, it may benefit you to invest a portion of your savings in an immediate annuity. It is not federally insured, so choose your company wisely. And be careful how much you invest if you're especially fond of flexibility, because once you make the commitment to an immediate annuity and begin receiving the stream of income, it's very likely you'll never be able to get your lump sum back.

Finally, you must consider your life expectancy. If you've already outlived most of your predecessors and have health complications of your own, an immediate annuity may be a horrible investment. It is typically going to pay you as long as you're alive … and no more. If you start the income stream Day 1 and die Day 2, all the money is gone. And you'll also be cutting out your heirs.


more @ http://www.usatoday.com/money/perfi/retirement/story/2012-01-07/generating-steady-retirement-income/52419830/1