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On money

Plan ahead to collect retirement benefits

By HELEN HUNTLEY
Published August 7, 2005

It's the thorniest question many soon-to-be retirees face: How should I take my benefits?

If you've earned a traditional pension, you can receive a monthly benefit for life, but you may be offered the choice of a lump sum payout. If you have a retirement savings plan such as a 401(k), you might be able to opt for the lifetime income of an annuity as an alternative to the lump sum.

Running the numbers is the first step in trying to compare a lump sum against a stream of payments. Get an accountant or financial adviser to help you if you're not handy with a financial calculator. Two key factors to evaluate are investment return and life expectancy. How do the figures the company used in its calculations compare with your own projections?

"A lot of advisers say "take the money; you can do better,' " said Jeb Graham, retirement plan specialist with CapTrust Financial Advisors in Tampa. "The problem, particularly if you know you're in pretty good health, is that you can outlive your income stream." Graham predicts annuity options will become more popular as baby boomers move into retirement.

But if you or your company's pension plan is in poor health, the lump sum may be more attractive.

Another big consideration is what kind of assets you have. Is this the primary source of income you'll have to pay bills with in retirement, or is it extra money you don't need now but hope to leave to your heirs?

If you are counting on the money for income, lifetime payments provide more security. If it's a nest egg for your grandchildren, opting for the lump sum secures the inheritance and creates more flexibility for estate planning.

Your personal risk tolerance is something else to keep in mind. Taking a lump sum means taking the investment risk; you may do better or worse than you've planned.

If you are married, your spouse's welfare has also to be taken into consideration. Your spouse will have to waive his or her pension rights for you to be able to take a lump sum or a pension payment that stops when you die. It's important to review your options carefully since survivor benefits reduce the size of the monthly payment.

"I would take 100 percent survivor benefits," Tampa financial planner Laura Waller said. "You never know when lightning will strike. I've seen cases where the healthy spouse died first. But those are really hard decisions for people to make."

Some life insurance sales people promote the idea of taking the higher payment for your lifetime only and buying a life insurance policy your spouse can collect on if you die first. However, these policies don't always work out as illustrated, and Waller notes that it can be difficult for retirees to come up with the money to continue paying the premiums.

The choice you are offered might not be an all-or-nothing proposition. If you have a fairly large pension or retirement savings account, you may be able to split the money, taking part of it as lifetime payments and part of it as a lump sum.

With the real estate investment market booming, I am thinking of building an investment home. If I do not live in the home, do I have to pay capital gains taxes if I reinvest the money in another home (keep rolling the profit into new investment homes) or if I use it to build a primary residence?

If this is strictly an investment property, you will owe capital gains tax when you sell, unless you buy another investment property that qualifies under the tax law as a 1031 exchange. There are rules on how the sale and purchase must be handled to get the tax deferral. Using the proceeds to build a primary residence offers no tax deferral.

What was that number to get a free credit report?

You can get a free credit report from each of the three major credit bureaus by calling toll-free 1-877-322-8228 or by visiting the Web site (www.annualcreditreport.com) or by writing Annual Credit Report Request Service, P.O. Box 105281, Atlanta, GA 30348-5281 (include your Social Security number). The report is free, but there's a charge if you want a credit score.

Helen Huntley writes about investing and markets for the Times. If you have a question about investments or personal finance, send it to On Money. We'll try to answer those we think are of greatest reader interest. All questions must be submitted in writing, but readers' names will not be published. Send questions to huntley@sptimes.com or Helen Huntley, Times, P.O. Box 1121, St. Petersburg, FL 33731.

[Last modified August 24, 2005, 15:40:13]