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MAKING THE MONEY LAST--AND THEN SOMEWhat's one of the biggest concerns among retirees? It's having too little money to live on. Even if your income is adequate when you first retire, you may live so long that you'll burn up your savings. This fear of insolvency will only intensify as life expectancies increase, Social Security becomes more tenuous, and--for those still contemplating retirement--employer-guaranteed pensions are replaced by 401(k) savings plans whose size depends largely on individuals' investment skills. What's alleviating some of the concern is that more people are planning to work longer. But even that extra income may not be enough. That's where products and strategies to augment sources of retirement income may help. True, boosting your current income may mean leaving less to your heirs. But the trade-off is peace of mind--and a more comfortable lifestyle, perhaps--for yourself. Among products you can buy is an annuity. This is an insurance company contract that, starting at age 59 1/2 or later, gives you a steady payment stream for a specified period or for your life. You also might want to take out a reverse mortgage. This lets you borrow against your home's value but postpone repayment until you move or die. Strategies for a consistent income flow include buying bonds with staggered maturities or stocks with differing dividend dates. Before you consider any of these options, look at your financial picture and create a plan. If you've done most of your saving and are approaching the collection of proceeds, you must determine your cash flow needs. Ask yourself what your fixed costs are and how much money you need to live annually. Next, calculate how much you can withdraw each year from your retirement portfolio. Remember that at 70 1/2, you must take out a certain amount each year from your 401(k) and individual retirement accounts. Using actuarial tables that estimate your life expectancy and some assumptions about returns, you can roughly determine how long your retirement savings will last. T. Rowe Price Retirement Planning software ($19.95) can help you do this. Considering inflation and stock and bond market fluctuations, you should be conservative. Farrell J. Dolan, senior vice-president at Fidelity Investments, figures that on a portfolio returning 3% above inflation, you can withdraw 4% to 6% annually while you're in your 60s, 5% to 7% in your 70s, and 6% to 8% in your 80s. With those figures, you can approximate whether your annual income will cover your expenses. If there's a shortfall, you need to act now. A first step might be to consider an annuity. There are two types. The tax-deferred kind allows your money to grow while you put off paying taxes until withdrawal, either in a lump sum or over time. Immediate annuities invest a chunk of money you've already saved and provide you with a payment stream. Both types can be variable or fixed. Variable annuities are invested in mutual funds; their payouts depend on market performance. Fixed annuities pay a set amount regardless of market changes. Despite the allure of steady income, 99% of annuity holders withdraw their money in a lump sum or when they need cash, according to Eric Sondergeld, a senior analyst at the Life Insurance Marketing & Research Assn. To encourage people to opt for regular payments instead of lump sums, the industry is creating more flexible plans. COMPLEX. For example, several companies such as Keyport Life Insurance (877 539-7678) and Aetna (800 238-6254) allow holders to exchange regular income checks for cash that liquidates the contract. Companies are also allowing for withdrawals while continuing to pay income. In return for greater liquidity, clients may face smaller payments and penalties for early withdrawals. Industry experts expect more people to choose income streams, since an annuity is still the only product that can generate them for a lifetime. The new immediate variable annuity is popular with those who want to avoid the complex minimum withdrawal requirements of IRAs and 401(k)s. So they're rolling over retirement accounts, tax-free, into immediate annuities. That's what Robert Barnes, a 76-year-old retired engineer from Wayland, Mass., did when he invested his $300,000 IRA in a Fidelity immediate variable annuity. He--or his heirs--will receive about $6,500 a quarter for at least the next 16 years. If he lives longer than 16 years, he'll still receive the quarterly payments, although his heirs will then be entitled to nothing. Because the annuity's principal can continue to grow tax-deferred, ''I get all the tax advantages of an IRA,'' Barnes says. ''But I don't have to monitor the account and the withdrawals as closely, and I get guaranteed income for life.'' Retired engineer Charles Voelker, 72, of Palm Desert, Calif., didn't opt for lifetime income. Instead, he invested $130,000 of his $200,000 portfolio in two 10-year Keyport immediate variable annuities, giving him $1,950 monthly. If he dies before the decade is up, his heirs will receive what's left. If he outlives the contracts, he'll get nothing extra. For all the attractiveness of a guaranteed monthly check, annuities have several weaknesses. They have high fees for money management and insurance expenses, plus penalties for early withdrawals. Annuity holders also pay income-tax rates of up to 39.6% on any capital gains, while mutual-fund holders pay only a 20% capital-gains rate. In fact, some critics think you'd be better off making regular withdrawals from your mutual funds instead of buying annuities. But ''systematic withdrawals from mutual funds are a logistical nightmare and don't provide for guaranteed life income,'' cautions Eric A. Solis, a financial planner in Indian Wells, Calif. You also should plan on investing only up to 15% of your savings in an annuity. ''Just as you diversify your portfolio for saving, you should do the same while you're taking income,'' recommends Steve E. Norwitz, a vice-president with T. Rowe Price Associates Inc. If most of your cash is tied up in your home, you certainly wouldn't sell it to fund an immediate annuity. But by using a reverse mortgage, you can tap the equity for income and not become homeless. ''This vehicle unlocks illiquid home equity and converts it into cash,'' says Harris Turkel, senior vice-president at GMAC Mortgage in Horsham, Pa. (888 737-4622). The money, paid out as a lump sum, in monthly installments, or set up as a line of credit, can be used for medical bills, ongoing expenses, or anything else. Because you're receiving loan proceeds, you pay no taxes on the cash. The amount you or your heirs owe is equal to what you received plus accumulated interest. But you'll never owe more than your home's value. A reverse mortgage was a huge help to Betty Taylor, 78, who had a cash crunch after her husband died in 1990. With her Social Security check slashed from $1,200 to $800 a month, she barely had enough to cover her fixed monthly costs of $500 plus a few extras. So at her son's suggestion, Taylor went to the Denver office of Wendover Financial Services Corp. (800 843-0480) and borrowed $40,000 against the value of her $90,000 town house in Golden, Colo. Taylor used some of the proceeds to pay off the $19,000 balance on her original mortgage. That left a $21,000 line of credit to use as she needs. So far, she has tapped it to replace her furnace. ''It has made a world of difference in my life,'' she says. To qualify, you must be at least 62 and live in your home. You can expect to receive 30% to 75% of your property value. But some of the proceeds will have to be used to pay off any existing mortgage. The older you are, the more you can borrow against your home's value. On a $250,000 house, a 62-year-old borrower can get a maximum credit line of $70,280, or $452 a month, with a Federal Housing Authority Home Equity Conversion Mortgage (HECM) loan, according to GMAC Mortgage Corp. Because the estimated term of the loan is shorter, that amount increases to $106,737, or $840 a month, at age 80. You can get a reverse mortgage from a lender affiliated with one of three organizations. Fannie Mae (FNMA) HomeKeeper and HECM are federal programs with maximum loan limits of $227,150 and $170,362, respectively. Irvine (Calif.)-based Financial Freedom Senior Funding Corp. (800 500-5150) makes reverse mortgages up to $750,000, but its program is not as widely distributed as the others and it only provides lump sum payments. ''Try to go to a lender that offers more than one program, because the loan amount can vary a lot for the same person,'' says Patrick J. McEnerney, president of BNY Mortgage Co. (800 677-9000). RENT A ROOM. Critics of reverse mortgages say they're too expensive, with closing costs running from $5,000 to $7,000. HECM loans also carry annual mortgage servicing fees of $360 and require insurance, says Leon Harper, housing specialist at the American Association of Retired Persons. And interest rates can be up to two percentage points above conventional 30-year home loans. Because it's so costly, a reverse mortgage makes sense only if you expect to remain in your home for at least five years. Reverse mortgages are complicated, so you should obtain loan counseling before you take one out. The HECM process, in fact, requires counseling, and FNMA makes it available. The counselor should help you consider alternative solutions, such as renting out a room in your home or local assistance programs, says Ken Scholen, director of the National Center for Home Equity Conversion. In the next six to eight months, another mortgage product that can help generate income will likely make its debut in the U.S. Already marketed in England, the ''shared appreciation mortgage'' is being developed by SBC Warburg Dillon Reed, an investment bank, for sale to lenders in the U.S. If you own your home debt-free, you'll be able to receive up to 25% of the value in exchange for giving up 75% of any future appreciation. Say your home is worth $100,000. You can get up to $25,000 now, without current obligations. Then your home's value appreciates to $125,000. If you move or die, you or your estate would pay the lender $18,750, or 75% of the $25,000 appreciation, plus the $25,000 principal. If your home's value doesn't rise, all you or your heirs will owe is $25,000. If your problem is one of ample assets but not enough ready income, bond and stock dividend ''laddering'' strategies may be the answer. To ladder a bond portfolio, you buy a series of bonds whose maturities are staggered, say for one, three, five, and eight years. Because the bonds have various interest payment dates, income is generated throughout the year. Moreover, you'll always have bonds maturing at different times, protecting you against rising rates and giving you flexibility to reinvest your capital as the bonds mature. Similar to bond laddering is investing in stocks with regular dividend payouts. You buy stocks with different payment times to create a reliable dividend stream. The data are available from the Standard & Poor's Stock Guide, which can be found in many libraries. A good idea is to look for companies that provide long-term holders with increasing returns through fairly regular dividend increases. S&P's The Outlook (800 852-1641) suggests this dividend portfolio: 75 shares of Equity Residential Properties Trust, 130 shares of Enova Corp., 105 shares of Carolina Power & Light, 80 shares of Meditrust, 85 shares of American Electric Power, and 75 shares of Weingarten Realty. At recent prices, you'd pay $20,742 before commissions and get annual income of about $1,206, and a yield of 5.9%. Whether you consider any of these income-generating options now or later, you should always plan to keep a chunk of your retirement savings in growth investments. That will help your portfolio beat inflation--and ensure that your savings outlive you.
By Toddi Gutner in New York RELATED ITEMS
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Updated July 9, 1998 by bwwebmaster
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