Keep Your Nest Egg Hatching
You've managed to accumulate some retirement savings, but come retirement, how will you manage your assets? Will you simply take a lump sum and hope to be able to control your expenditures? Or will you opt for a steady stream of income that will last you the rest of your life?
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If you are confident that you can manage your spending, then either choice could be a good one. However, the latter option presents much less risk and can ensure an income into the future. For retirees, running out of income and assets should be of major concern.
Many companies offer lump sum payments as part of their retirement benefit plans, whether through a defined-contribution plan or through a more traditional pension plan, and studies show that up to 90 percent of retirees opt for the lump sum. Many are unaware that retirement benefits can be paid in different forms. Accepting a lump sum payment could be beneficial if the recipient is careful about investing the payout.
For example, a retiree could invest the money within the confines of a tax-free IRA and initiate periodic or systematic withdrawals, often directly into a bank account.However, other investment options exist that can contribute toward a lifelong income stream after retirement.
The following are some plans into which you might want to look:
Opt for Less Control with Little Risk
While all existing 401(k) plans allow lump sum distributions to retirees, many permit partial distributions, and some even offer the option of buying an annuity, which can provide a systematic lifetime payment with the investment of a lump sum. In addition, half of existing 401(k) plans allow retirees to make use of installment plans for withdrawing cash, although these plans are little known, and only about 12 percent of retirees take advantage of such programs on a national basis.
Purchase an Immediate Annuity.
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These insurance products can provide retirees with peace of mind by guaranteeing systematic income payments through the term of their lives. The payout received from an immediate annuity is dependent upon the lump sum invested, the recipient's age, and the current interest rate, so income could rise and fall with the changing economic climate, but laddering annuity investments allows a retiree to obtain something close to dollar-cost-averaging.
Opt for Complete Control with Added Risk
If you're feeling confident, you can set up a plan that will withdraw a set percentage of your total assets each year, but it would be up to you to ensure that you make each payment last the year through and that you don't withdraw so much that your nest egg dwindles. Conservatively, it is estimated that you can withdraw about 3 to 4 percent of your assets yearly, adjusting for inflation, without running out of money.If this plan interests you but you lack the know-how, you can always retain the help of a qualified financial planner.
Opt for the Middle Road
By laddering bonds, purchasing bonds with staggered maturity dates, you can provide yourself with steady income. While this option cuts down on risk, it could prove to have less longevity than other options.