While on vacation last summer my family took a break from boating and stopped at the lake resort’s candy shop “The Sugar Shack”. My kids were each allowed to choose any candy of their liking. Just imagine being a kid and walking into the shop with aisles of glass candy jars filled with any kind of candy imaginable. There were so many choices and it was difficult for them to decide… chocolate, toffee, gummy bears, etc. Both kids wandered around the store for many minutes. Each paralyzed to make a choice for fear they would make a mistake and want something different. Just before I was to lose my patience my daughter decided, but it took several more minutes before my son picked up a scoop. In the end my daughter chose just one candy (white grapefruit gummy slices), while my son ended up with an assortment of candies (mostly of the chocolate variety).
While altogether different, the same can be said for payout strategies when individuals retire and elect to start taking benefits. Many feel paralyzed when it comes to making these types of decisions. In fact, not having enough money for retirement is the top financial concern for two-thirds of Americans. Some retires will choose one payout option while others choose a multiple of payout options. It doesn’t have to be overwhelming, if there is a retirement exit strategy. Planning is the key to achieving one’s retirement income goals.
When making a plan it is important to look at all retirement income sources. In addition to a 401(k) plan, other retirement plans such as a traditional pension plan, Social Security and personal investments. More than likely the amount generated (when not including the 401(k) plan) will fall short of the desired goal, but the question is how much more is needed to cover living expenses, not sacrifice lifestyle AND keep pace with inflation.
There are also other factors to consider such as:
- How much debt will the retiree have?
- Will there be a period of time where the other sources of income (such as Social Security) are not available after retirement?
- How will healthcare be paid? Will the employer offer retiree healthcare coverage, extend coverage through COBRA, retiree purchase their own healthcare insurance or be eligible for Medicare?
- Will a part-time job be needed to offset these additional costs?
A financial professional can help individuals find the answers to these questions. Once it is determined the amount needed, the next question to ask is how much can safely be paid out each year. The most common payout options available are:
- installment payments which allow a retiree to choose a rate of withdrawal (generally 4-5% of the initial balance and adjusted annually for inflation)
- annuity options which offer guaranteed income for life
- non-periodic payments which are taken on an as needed basis
In making the decision of the payout option or options to choose a retiree should consider the importance of the ability to leave money to heirs, market risk tolerance, emergency funds, inflation, healthcare costs, and the risk of outliving savings. If it is estimated that income needs and wants cannot be met then the individual should consider other strategies such as saving more during his or her working years, delaying retirement, working part-time or modifying the retirement lifestyle dream.
It is important to remember that not one strategy will work for all individuals. At the end of the day the goal should be to make a plan where a retiree can enjoy the retirement years without worries of outliving savings.
It is important to encourage plan participants to make a plan. It is never too early to make a plan with a financial professional to estimate how much money is needed to retire and live the retirement dream. In retirement I would like to be able to go back to the summer lake resort and who knows maybe even visit the Sugar Shack for some candy of my own…definitely chocolate.
 Principal Financial Well-Being Index, Fourth Quarter 2011
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