AssetBuilder Inc. Registered Investment Advisor - Simple Investing. Smart Future.

Scott,

When I retire, I will receive a pension that will meet 70% of my projected monthly costs.  I have contemplated using some of my 401k balance to purchase an annuity to meet the remaining $2000.00 a month shortfall from the pension.  I would need this annuity to also include continuation for my wife. My thoughts are that in this way, I could use the remaining 401k to grow for life's unexpected bumps in the road.

I currently have $690,000 in the 401k account.  Is this a plan I should continue to research?

Regards,

Paul

Scott,

I am a teacher and have a 403B account with AIG through Edward Jones.

I am interested in moving this money to lower cost index funds but need information on the procedure for doing so.

Many thanks,

Keith

Keith,

The easiest way is to do a 1035 exchange, moving from one variable annuity contract to another. The variable annuities offered by both Vanguard and Fidelity have very low insurance costs, so your total cost would drop considerably. Vanguard people once told me that they don't market their VA but simply wait for people to discover it's benefits and do a 1035 exchange. Either firm will be able to help you make a 1035 exchange.

You should also find out if you can do a straight IRA rollover. This would allow you to shed the insurance contract cost and invest directly in index funds, cutting costs still further.

Scott

Paul,

Yes, you're on the right track. Depending on your age and the life annuity payout options you choose, you could use a portion of your 401k balance to buy a life annuity to close that $2,000 a month shortfall. The remainder of the account could be invested for long term growth to provide you with an inflation hedge.

Before you do this, however, you should also factor future Social Security benefits into the equation. Recently, the Social Security Administrations website, www.ssa.gov, introduced a new benefits calculator that will automatically load your earnings record and project your future benefit. Given your 401(k) accumulation, I think its a good bet that your combined SS benefits will be over $2,000 a month.

If you are retiring early, either at age 62 or before, the thing to do is use a portion of your 401(k) assets to "bridge" the income gap between the day your salary stops and the day your Social Security benefits begin. While you may be tempted to take benefits early because it will reduce what you withdraw from your 401(k) assets, you and your spouse will be better off if you delay at least your benefits, allowing them to grow. Then take your benefits around age 68 or 69.

The benefits of doing this are covered in detail in my new book with economist Larry Kotlikoff, "Spend 'til the End" (Simon & Schuster, June 2008). The subject is also covered in a number of columns on our AssetBuilder website.

Here is one of those links. Links to other columns on this topic can be found at the bottom of the page:

http://assetbuilder.com/blogs/scott_burns/archive/2007/10/31/yes-for-many-it-s-better-to-take-social-security-benefits-later.aspx

Scott