THE SAVINGS GAME | HUMBERTO CRUZ

How do you manage money in retirement? There's no perfect solution

By Humberto Cruz | November 16, 2007

I have confused you.

Whenever I discuss a way to manage money in retirement, many of you see it as a recommendation. How can I be in favor of something one week and something else the next, you ask.

One thing I clearly don't advocate is trying to live simply off the interest from your savings, without touching principal. Unless you are super-rich, live a Spartan life, or plan to die soon, I don't see how this strategy can generate an adequate income that keeps up with inflation during a retirement that could last 30 years or more. Maybe you can do it with stock dividends that rise regularly, but the risks and uncertainties are too high.

But how about these strategies?

Repeatedly creating "income ladders" with part of your savings while investing the rest for growth.

By receiving income and liquidating principal from fixed-income investments, you may be able to cover your expenses for, say, the next 10 years. By then, your other investments may have grown enough to set up a new income ladder. This strategy requires a fair amount of money to implement and does not eliminate the risk of loss.

Putting all your money in a diversified portfolio of stocks, bonds, and other asset classes and making "systematic withdrawals" for living expenses. Aside from the risk of loss, if you withdraw too much too soon you may run out of money. If you are too cautious and withdraw too little, you'll miss out on things.

Using new types of mutual funds that manage the withdrawals for you.

Low-cost, widely diversified funds are available from Fidelity and Vanguard that are designed to pay out fairly predictable monthly income, with the potential to keep up with inflation. While projected payouts are based on reasonable expectations, there are no guarantees, and you could lose money.

Buying an immediate annuity from a financially strong insurance company that, in return for your lump-sum premium, guarantees you (or you and your spouse) a monthly income for life, either fixed or rising each year to counteract inflation. You won't outlive your money but will forever give up access to your principal or seriously limit such access.

Investing in a deferred variable annuity that, for a fee, guarantees that you (or you and your spouse) can withdraw at least a minimum amount each year for life, no matter how your investments perform. (Immediate income annuities that pay a set income for life and deferred variable annuities with mutual-fund-like investment "sub-accounts" are different products. More than 100 reader e-mails suggest that many of you incorrectly think the two are the same.)

My recommendation?

Discarding the impractical don't-touch-the-principal strategy, it would be "any, some, all, or perhaps none of the above," depending on circumstances. While this may seem like a cop-out, no one product or strategy can do it all, and needs are different for different people, emphasize Boyce Greer and Jon Skillman, two Fidelity Investments executives.

Their comments are appropriate, because Fidelity is the only financial services firm I know that offers brokerage services and low-cost, direct-marketed funds and immediate and variable annuities that can be used for all the strategies I mentioned.

Fidelity's new Growth and Guaranteed Income deferred variable annuity guarantees minimum lifetime withdrawals at substantially lower fees than other annuities offering similar guarantees.

If you go online to fidelity.com and type "income products" in the search box, you will find admittedly promotional but nevertheless highly educational materials and useful tools to compare the pros and cons of different products and strategies.

Humberto Cruz is a columnist for the South Florida Sun-Sentinel. He can be reached at AskHumberto@aol.com.

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