Income for life: Slicing up your savings
CNN Money, June 14th, 2007
Question: How do I convert the balance in my 401(k) into a monthly income when I retire? - Jim, Midlothian, Virginia
Answer:
You're dealing with an issue that more and more people, especially
aging baby boomers, must face as they enter retirement without the
benefit of a traditional "check a month" pension from their employers.
Yes, Social Security does provide a reliable monthly income - in fact,
one that rises with inflation - but it's not enough for most people.
So the question is, how do you take what is essentially a lump sum
of cash sitting in your 401(k) - or, in your IRA rollover account, if
you move your 401(k) to an IRA after retirement - and convert it into
an income that in combination with Social Security can support you
throughout a retirement that could easily last 30 years or longer?
You've
got several options. One is to simply invest the money in a diversified
portfolio of stocks and bonds and then pull out enough so that your
withdrawals plus Social Security will provide enough to live on.
That
sounds simple enough, but there are a number of practical issues you'll
have to sort out in order to pull it off. The main one is how much can
you afford to draw from your account without running through your money
while you're still alive. After all, a 65-year-old man today has about
a 50/50 shot at living to 85 and a one-in-four chance of still being
around at 91.
And unless Federal Reserve Chairman Ben Bernanke
and the rest of the gang at the Fed find a way to stop inflation,
during that time prices are likely to keep rising. Which means you'll
have to increase the amount you pull from your portfolio each year if
you want to maintain your purchasing power.
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