Numerous retirees face the ‘Lump Sum’ challenge when retiring from their organization: ‘Do I Need To take a lump sum which I’ll manage for all or portion of my retirement investments – or simply annuitize it (as a retirement annuity) for a life time revenue and be carried out with management concerns?’ Let us think about a few of the benefits and drawbacks of each alternative for this pot of retirement investments.
Directly managing income from the lump sum through your own investment choices and buying a set annuity represent two polar choices for retirement investments. Analyzing the benefits and drawbacks of each can help you place yourself for a probable intermediate strategy.
A lump sum can come as a pension strategy choice from work, the result of your company 401(k) savings, or your personal IRA savings, and possibly as an inheritance. Your decision regarding how to handle retirement investments has a lot to do with your psychological make-up and risk tolerance.
Controlling retirement investments requires effort and time. You should research and choose investments which will equally grow your money to offset inflation, reduce loss to prevent market downturns, and incorporate income producing investments that will allow month-to-month and emergency withdrawals that do not force untimely investment losses.
You achieve these objectives by appropriately allocating your retirement investments between equity and revenue investments, together with holding some cash equivalents such as Certificates of deposit or cash market funds. Constantly rebalancing your portfolio will help you capitalize on any benefits too and keep you in line with your objectives.
You must maintain your withdrawals low – perhaps 3% to 4% in the early years – to make sure you won’t consume your retirement investments too quick. You do not wish to use up all your assets if you encounter a severe market down turn and/or you live a lengthy existence.
The worry about running out of retirement investments – or nearly so – frightens a lot of people. That’s where your psychological makeup will come in and what tends to make an annuity always a realistic option.
Taking a fixed annuity or purchasing an annuity relieves you of investment management concerns by converting your retirement investments into a fixed monthly payment for life. That payment can be for your life or your spouse’s too. Inflation, sadly, will deteriorate the value of your payments. Even at only a 2% inflation rate, a $2,000-a-month payment would lose a 3rd of its purchasing power in 20 yrs. Also, taking an annuity limits access to your principal. That is a issue if emergencies or for unexpected expenses crop up.
The table summarizes the pros and cons of each. You are able to constantly discover an intermediate technique that satisfies some worries of both extremes.
|
Manage Retirement Investments or Annuitize it? |
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| Manage Your Lump Sum | Buy a Fixed Annuity | |
| Pros:
|
More potential for growth | Income assured |
| Can offset inflation | Lifetime payments | |
| Withdraw at your own rate | Fixed income payments always | |
| Cons: | Risk: Possible loss in investments | Inflation erodes payment value |
| Unpredictable markets | No access to principal | |
You are able to split your retirement investments in two parts and purchase a fixed annuity with half and manage the remaining. Your fixed annuity permits you to be more ‘growth’ oriented in your portfolio to counter the inflation results in your annuity payments. You can always choose later to convert the self-managed portfolio to an annuity too if you’re tired of managing it.
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