Q. I am planning to use about 1/3 of my liquid assets (401K and IRA funds) to purchase a lifetime annuity (20 years certain) for my wife and I.   My age is 62 and my wife is 56 and I have three small pensions, which will cease at my death and Social Security.   To ensure that she has income for her life, the annuity would provide about 1/3 of my planned retirement income ($1400 a month). This income coupled with her Social Security and our other assets should provide a comfortable income for her life if I die before she does, which is statistically likely to happen.

I will consider the annuity as the fixed portion of my retirement funds and then keep about half the other money in equities since between the pensions, the annuity, Social Security, and some bonds and cash, I can muddle through a steep downturn in the market if that occurs.

The annuity I have priced from Lincoln Benefit Life is currently paying $1,386 per month for a $200,000 investment with payments to me starting one year after giving them the $200,000.   I would keep $200,000 in bonds and $200,000 in equities. This seems to be an efficient way to minimize the ups and downs of the market. I plan to draw 7% of the non-annuity funds if needed and expect to have adequate income until I am 95. We have no debts. Comments?

      ---D. R., by e-mail

  

A. Give yourself a pat on the back. The traditional three-legged stool of retirement income was a combination of Social Security, a private company pension, and personal investments, a combination that provided stability and security. With fewer workers covered by defined benefit pensions each year, however, many people in the 401k generation are going to find buying a single premium annuity with a portion of their assets--- what you've decided to do--- is a good way to broaden the security of their retirement.

With an effective payout of 8.3 percent, your use of an annuity will allow you to reduce your withdrawal rate from your remaining assets, increasing the chances that you won't run out of money.

  

Q. Was the Social Security "fund" originally set up to so that the current generation would pay the benefits for the retired generation?   Or has the fund evolved to this type of pay structure by poor legislation/legislators?

---D. F., by e-mail

  

A. When Social Security was established all the language used to describe it made it sound like a worker-funded investment trust with individual accounts and ownership. In fact, there are no individual accounts and there is no ownership. Social Security is a government benefit supported by a special tax, the employment tax. During most of its history the Social Security trust fund was simply a cash buffer between tax revenue flowing in and cash benefits flowing out. It seldom amounted to more than a few months of benefit payments.

Recognizing the future revenue shortfall and not wanting to have a large increase in FICA taxes in a short period, Congress later raised the FICA tax so that current workers would start to build a surplus in the trust fund. The idea was to have a trust fund large enough to smooth out the surge in benefit payments when the baby boomers started to retire.

Note that the purpose of the fund was help deal with a rush of rising benefits claims, NOT to create an investment vehicle whose growth would find later retirements. Always a cash buffer between tax revenue coming in and benefits going out, the Trust fund is now only a larger cash buffer.

The actual tax money is sent to the Treasury. The Treasury borrows the cash, leaving an I.O.U. in the form of a Treasury obligation in the trust fund. The government then spends the cash. The trust fund has enabled government to spend more money than it raises in regular income, corporate, and estate taxes. Sadly, the employment tax is the most regressive tax available.