Q. I am a 60-year-old police officer looking at retirement in a year or two. Our retirement system offers several options. Basically you can collect a larger monthly retirement check and not take a lump-sum payment. Or you can take a lump-sum payment and settle for a smaller retirement check each month.

I’m married (wife does not work) and earn about $75,000 a year. I own a 4-year-old house (paid for), 2 relatively new cars (paid for), and have no other debts. We have $170,000 in checking, savings and CDs and about $15,000 in an IRA. We have always lived within our means, and I will probably work part time after “retirement.”

I don’t really NEED the cash benefit, but everyone says it is best to take the cash and a lower monthly benefit. I would appreciate your thoughts…… ---G.B., by email from Dallas

A. The answer to your question involves two specific considerations. First, is there a value to taking cash up front over taking a lifetime income? Second, is the amount of cash being offered fair and reasonable, given the income you have to give up?

Cash is most valuable to people who haven’t got any. There are people who get to retirement who haven’t got a dime put away for meeting unexpected expenses. You aren’t that person. You and your wife have more than two years of your pre-tax income in savings and investments. You’ve got emergency resources that you can allow to grow. And the more income you start with, the longer you can allow your savings to grow, whether or not you work.

The amount of cash being offered is reasonable. Your retirement income will decline by $311.61 a month for each $55,560 cash payment you accept if you take the 75 percent survivor income option. That payment, however, amounts to 6.73 percent of the cash amount. By taking the life income instead of the cash payment, you’ll break even in 15 years. That’s about half of your joint life expectancy, assuming both of you are 60 years old. So your “return” on that forgone $55,560 will be about 5.3 percent if one of you lives to your joint expectancy.

Since living expenses decline when a spouse dies, the 75 percent option is a good match to future expenses.

 

Q. I have a 401(k)/pension plan, and I am happy with my investments. My unhappiness is in the fees department. They charge 2 percent to 2.5 percent on each transaction, and I find it expensive for these times of uncertainty and fluctuation. My investments are in stocks that I have chosen. I manage my portfolio without advice. ---N. T., by email

A. The path you have chosen is not a good way for most people to build their retirement assets. The purchase of individual stocks, regardless of who decides which stocks to buy, has a lot more risk than the purchase of portfolios of stocks or bonds. Most research indicates that you need a portfolio of about 30 stocks before you have reduced the risk of individual stocks to acceptable levels. That's a lot of stocks to buy, own, and follow.

Adding a 2 to 2.5 percent transaction fee simply loads the deck against you. Since a broad domestic market index fund can be purchased for only 0.2 percent a year, you're about 2 percentage points behind each year unless you make very few transactions. While 2 percent doesn't seem like much in any single year, it's major over long periods.

According to the Morningstar mutual funds database, for instance, over the last 15 years large-cap blend funds at the 25th percentile earned 6.9 percent annualized per year. Funds at the 75 percentile--- meaning 75 percent of all funds in their category did better--- returned 5.13 percent a year. The 1.77 percent difference is less than you could be spending on transactions, and it took performance from top quartile to bottom quartile. I don't think that's what you want to do with your retirement money.

The positive alternative: Start investing in low-cost index funds and capturing the return of each selected asset class. If you want to continue on your current path, the best option is an online brokerage account. Active investors pay about $8 a trade. You'd have to make a lot of small purchases and sales to get your transaction costs up to 2 percent.