MONEY retirement planning

How to Balance Spending and Safety in Retirement

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Roberto A. Sanchez—Getty Images

Every retirement withdrawal method has its pros and cons. Understanding the differences will help you tap your assets in the way that's best for you.

You’ve saved for years. You’ve built a sizable nest egg. And, finally, you’ve retired. Now, how do you withdraw from your savings so your money lasts as long as you do? Is there a technique, a procedure, a product that will keep you safe?

Unfortunately, there is no perfect answer to this question. Every available solution has its strengths and its weaknesses. Only by understanding the possible approaches, then mixing them together into a personal solution, will you be able to move forward with an enjoyable retirement that balances both spending and safety.

Let’s start with one of the simplest and most popular withdrawal approaches: spending a fixed amount from your portfolio annually. Typically this is adjusted for inflation, so the nominal amount grows over time but sustains the same lifestyle from year to year. If the amount you start with, in year one of your retirement, is 4% of your portfolio, then this is the classic 4% rule.

The advantages of this withdrawal method are that it is relatively simple to implement, and it has been researched extensively. Statistics for the survival probabilities of your portfolio, given a certain time span and asset allocation, are readily available. This strategy seems reliable—you know exactly how much you can spend each year. Until your money runs out. Studies based on historical data show your savings might last for 30 years. But history may not repeat. And fixed withdrawals are inflexible; what if your spending needs change from year to year?

Instead, you could withdraw a fixed percentage of your portfolio annually, say 5%. This is often called an “endowment” approach. The advantage of this is that it automatically builds some flexibility into your withdrawals based on market performance. If the market goes up, your fixed percentage will be a larger sum. If the market goes down, it will be smaller. Even better, you will never run out of money! Because you are withdrawing only a percent of your portfolio, it can never be wiped out. But it could get very small! And your available income will fluctuate, perhaps dramatically, from year to year.

Another approach to variable withdrawals is to base the amount on your life expectancy. (One source for this data is the IRS RMD tables.) Each year you could withdraw the inverse of your life expectancy in years. So if your life expectancy is 30 years, you’d withdraw 1/30, or about 3.3%, in the current year. You will never run out of money, but, again, there is no guarantee exactly how much money you’ll have in your final years. It’s possible you’ll wind up with smaller withdrawals in early retirement and larger withdrawals later, when you aren’t as able to enjoy them.

What if you want more certainty? Annuities appear to solve most of the problems with fixed or variable withdrawals. With an annuity, you give an insurance company some or all of your assets, and, in exchange, they pay you a monthly amount for life. Assuming the company stays solvent, this eliminates the possibility of outliving your assets.

Annuities are good for consistent income. But that’s also their chief drawback: they’re inflexible. If you die early, you will leave a lot of money on the table. If you have an emergency and need a lump sum, you probably can’t get it. Finally, many annuities are not adjusted for inflation. Those that are tend to be very expensive. And inflation can be a large variable over long time spans.

What about income for early retirement? It’s unwise to draw down your assets in the beginning years, when there are decades of uncertainty looming ahead. The goal should be to preserve net worth until you are farther down the road. If your assets are large enough, or the markets are strong enough, you can live off the annual interest, dividends, and growth. If not, you may need to work part-time, supplementing your investment income.

Every retirement withdrawal technique has drawbacks. Some require active management. Some can run out of money. Some don’t maintain your lifestyle. Some can’t handle emergency expenses or preserve principal for heirs. Some may be eroded by inflation.

That’s why I believe most of us are going to construct a flexible, “hybrid” system for living off our assets in retirement. We’ll pick and choose from the available options, combining the benefits, while trying to minimize the liabilities and preserve our flexibility.

Darrow Kirkpatrick is a software engineer and author who lived frugally, invested successfully, and retired in 2011 at age 50. He writes regularly about saving, investing and retiring on his blog CanIRetireYet.com.

For more help calculating your needs in retirement:
The One Retirement Question You Must Get Right
How to Figure Out Your Real Cost of Living in Retirement
4 Secrets of Financial Freedom

MONEY retirement income

Simple Steps to Avoid Outliving Your Money in Retirement

Nearly all workers say guaranteed lifetime income is important in retirement. Yet few are doing anything about it.

The slow switch from defined-benefit to defined-contribution retirement plans has been under way for three decades. But only now are workers starting to fully appreciate the impact.

The vast majority of Americans say that having a guaranteed monthly check for the rest of their lives is important, according to a TIAA-CREF lifetime income survey. Nearly half say securing enough guaranteed income to cover monthly expenses should be the top goal of their retirement plan.

Just a year ago, only one third believed guaranteed income should be their top priority. Meanwhile, more Americans now say they would accept bigger risks and smaller returns in exchange for guaranteed income, the survey found.

Few saw this coming in the 1980s, when companies began to abandon their traditional pensions in favor of 401(k) savings plans. The thought was that the 401(k) would complement the guaranteed income from a traditional pension—not supplant it. Today the only guaranteed income most Americans will enjoy in retirement comes from Social Security. Meanwhile, the majority of workers keep the bulk of their liquid savings in a 401(k) plan. And they must manage those distributions throughout retirement, while trying not to run out of money before they pass away.

This new reality is just now hitting a generation that figured their 401(k) plan would grow so big that making the money last in retirement would be fairly simple. But for most it didn’t work out that way—and now they are searching for answers. Guaranteed lifetime income, once a staple of old age for many Americans, has become an elusive grail.

One big problem is that workers typically do not understand how to convert savings into a lifetime stream of income, and they generally do not trust the annuity products available to them. While 84% say lifetime income is important only 14% have bought an annuity, TIAA-CREF found. Fixed annuities through a high-quality insurance company are among the simplest ways to purchase guaranteed lifetime income.

With this gap in mind, policymakers and employers have been taking steps to make it easier and more palatable for 401(k) plan participants to convert some or all of their plan assets to an income stream. Yet 44% of Americans have no idea if their plan offers a lifetime income option. Some 62% have never tried to calculate lifetime income from their current level of savings.

Fortunately, it’s getting easier to figure out the amount of income your 401(k) is likely to provide. For starters, check with your benefits department and ask if your employer has, or is considering, an option that will convert savings into a lifetime annuity. If so, and you’re close to retirement, you can get an estimate of the amount of income it may provide.

There are also online tools for do-it-yourself annuity shoppers.You can get quotes for immediate and deferred annuities at immediateannuites.com. And for pre-retirees, you can get an idea of how far your savings will go by plugging in your age and savings on BlackRock’s CoRi calculator. Currently, BlackRock estimates that a 58-year-old with $1 million in savings and who retires at 65 will be able to purchase $51,600 of annual guaranteed lifetime income.

Annuities come in many varieties—and some have a checkered past, while others may be linked to high fees and hard sales pitches. But immediate and deferred fixed annuities are fairly straightforward and offer the most direct way to secure lifetime income. Typically advisers recommend that you put only a portion of your income into one. (For more on annuities, click here.)

If an annuity sounds right for you, consider moving slowly. If interest rates move up the second half of the year, as many expect, you’ll get more income for your dollars by waiting.

Read next: The Right Way to Tap Income in Retirement

MONEY retirement planning

5 Secrets to a Happy Retirement

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Jason Hindley—Prop Styling by Keiko Tanaka Keep a smile on your face once your working years are over.

Sure, a fat nest egg and good health help. But there are less obvious ways to make sure your post-work life is a happy one.

Retirement ought to be a happy time. You can set your own schedule, take long vacations, and start spending all the money you’ve been saving.

And for many retirees that holds true. According to the Gallup-Healthways Well-Being Index, people tend to start life happy, only to see their sense of well-being decline in adulthood. No surprise there: Working long hours, raising a family, and saving for the future are high-stress pursuits.

Once you reach age 65, though, happiness picks up again, not peaking until age 85. In a recent survey of MONEY readers, 48% retirees reported being happier in retirement than expected; only 7% were disappointed.

How can you make sure you follow this blissful pattern? Financial security helps. And good health is crucial: In a recent survey 81% of retirees cited it as the most important ingredient for a happy retirement. Some of the other triggers are less obvious. Here’s what you can do to make your retirement a happy one.

1. Create a predictable paycheck. No doubt about it: More money makes you happier. Once you amass a comfortable nest egg, though, the effect weakens, says financial planner Wes Moss. For his recent book, You Can Retire Sooner Than You Think: The 5 Money Secrets of the Happiest Retirees, Moss surveyed 1,400 retirees in 46 states. The happiest ones had the highest net worths, but Moss found that money’s power to boost your mood diminished after $550,000.

“Once you reach a certain level, more money doesn’t buy a lot more happiness,” says Moss. Similar research based on the University of Michigan Health and Retirement Study found a dropoff in happiness with extreme wealth; after you’ve amassed some $3.5 million in riches, more money doesn’t increase your happiness as much.

Where your income comes from is just as important as how much savings you have, says Moss. Retirees with a predictable income—a pension, say, or rental properties—get more enjoyment from spending those dollars than they do using money from a 401(k) or an IRA.

Similarly, a Towers Watson happiness survey found that retirees who rely mostly on investments had the highest financial anxiety. Almost a third of retirees who get less than 25% of their income from a pension or annuity were worried about their financial future; of those who receive 50% or more of their income from such a predictable source, just under a quarter expressed the same anxiety.

You can engineer a steady income by buying an immediate fixed annuity. According to ImmediateAnnuities.com, a 65-year-old man who puts $100,000 into an immediate annuity today would collect about $500 a month throughout retirement.

2. Stick with what you know. People who work past 65 are happier than their fully retired peers—with a big asterisk. If you have no choice but to work, the results are the opposite. On a scale of 1 to 10, seniors who voluntarily pick up part-time work rate their happiness a 6.5 on average; that drops to 4.4 for those who are forced to take a part-time job.

The benefit of working isn’t just financial. It’s also a boon to your health—a key driver of retirement happiness. The physical activity and social connections a job provides are a good antidote to an unhealthy sedentary and lonely lifestyle, says medical doctor turned financial planner (and Money.com contributor) Carolyn McClanahan.

A 2009 study published in the Journal of Occupational Health Psychology found that retirees with part-time or temporary jobs have fewer major diseases, including high blood pressure and heart disease, than those who stop working altogether, even after factoring in their pre-retirement health.

Switching careers in retirement, though, isn’t as beneficial. Retirees who take jobs in their field reported the best mental health, says lead researcher Yujie Zhan of Canada’s Laurier University, perhaps because adapting to a new work environment and duties is stressful.

3. Find four hobbies. Busy retirees tend to be happier. But just how active do you have to be? Moss has put a number on it. He found that the happiest retirees engage in three to four activities regularly; the least happy, only one or two. “The happy retiree group had extraordinarily busy schedules,” he says. “I call it hobbies on steroids.”

For the biggest boost to your happiness, pick a hobby that’s social. The top pursuits of the happiest retirees include volunteering, travel, and golf; for the unhappiest, they’re reading, hunting, fishing, and writing. “The happiest people don’t do things in isolation,” says Moss.

That’s no surprise when you consider that people 65 and older get far more enjoyment out of socializing than younger people do.

4. Rent late in life. In retirement, as in your working years, owning a home brings you more joy than renting does. But as time goes on, that changes. Michael Finke, a professor of retirement and personal financial planning at Texas Tech University, analyzed the satisfaction of homeowners vs. that of renters from age 20 to 90-plus and found a drop late in life, particularly after homeowners hit their eighties.

The hassles of homeownership build as you age, Finke notes, and a house can be isolating. Most people want to stay put in retirement. Yet, says Finke, “you need to plan for a transition to living in an environment with more social interaction and less home responsibility.”

5. Keep your kids at arm’s length. Once you suddenly have a lot more time on your hands, your closest relationships can have a big impact on your mood. According to an analysis by Finke and Texas Tech researcher Nhat Hoang Ho, married retirees, particularly those who retire around the same time, report higher satisfaction than nonmarrieds—but only if the couple get along well. A poor relationship more than erases the positive effects of being married.

Children don’t make much of a difference, with one twist. Living within 10 miles of their kids leaves retirees less happy. “People overestimate the amount of satisfaction they get from their kids,” says Finke. The reason is unclear—could being a too accessible babysitter be the problem?

MONEY retirement planning

3 Simple Steps to Crash-Proof Your Retirement Plan

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Thomas J. Peterson—Getty Images

The recent stock market slide is timely reminder to protect your retirement portfolio from outsized risks. Here's how.

At this point it’s anyone’s guess whether the recent turmoil in the market is just another a speed bump on the road to further gains or the start of a serious setback. But either way, now is an ideal time to ask: Would your retirement plans survive a crash?

The three-step crash-test below can give you a sense of how your retirement plans might fare during a major market downturn, and help you take steps to avert disaster. I recommend you do this stress-test now, while you can still make meaningful adjustments, rather than waiting until a crisis actually hits—and wishing you’d taken action beforehand.

1. Confirm your asset allocation. The idea here is to divide your portfolio into two broad categories: stocks and bonds. (You can create a third category, cash equivalents, if you wish, or throw cash into the bond category. For the purposes of this kind of review, either way is fine.)

For most of your holdings this exercise should be fairly simple. Stocks as well as mutual funds and ETFs that invest in stocks (dividend stocks, preferred shares, REITs and the like) go into the stock category. All bonds, bond funds and bond ETFs go into the bond category. If you own funds or ETFs that include both stocks and bonds—target-date funds, balanced funds, equity-income funds, etc.—plug their name or ticker symbol into Morningstar’s Instant X-Ray tool and you’ll get a stocks-bonds breakdown. Once you’ve divvied up your holdings this way, you can easily calculate the percentage of your nest egg that’s invested in stocks and in bonds.

2. Estimate the downside. It’s impossible to know exactly how your investments will perform in a major meltdown. But you can at least estimate the potential hit based on how your portfolio would have fared in past severe setbacks.

In the financial crisis year of 2008, for example, the Standard & Poor’s 500 index lost 37% of its value, while the broad bond market gained just over 5%. So if you’ve got 70% of your retirement portfolio in stocks and 30% in bonds, you can figure that in a comparable downturn your nest egg would lose roughly 25% of its value (70% of -37% plus 30% of 5% equals 24.4%—we’ll call it 25%). If your portfolio consists of a 50-50 mix of stocks and bonds, its value would drop about 15%.

Remember, you’re not trying to predict precisely how the market will perform during the next crash. You just want to make a reasonable estimate of what kind of hit your retirement savings might take so you can get an idea of what size nest egg you may end up with when things get ugly.

3. Assess the impact on your retirement. Go to a retirement income calculator that uses Monte Carlo simulations and enter your nest egg’s current value as well as such information as your age, income, when you plan retire, how your savings are invested and how much you’re saving each year (or spending, if you’re already retired). You’ll come away with the percentage chance that you’ll be able to generate the income you’ll need throughout retirement based on things as they stand now. Consider this your “before crash” estimate. Then, get an “after crash” estimate by plugging in the same info, but substituting your nest egg’s projected value after a downturn from step 2 above.

You’ll now be able to gauge the potential impact of a market crash on your retirement prospects. For example, if you’re 45, earn $80,000 a year, contribute 10% of pay to a 401(k) 70% in stocks and 30% in bonds that has a current balance of $350,000, you have roughly a 70% chance of being able to retire on 75% of pre-retirement salary, according to T. Rowe Price’s Retirement Income Calculator. Were your portfolio’s value were to drop 25% to $262,500 in a crash, your probability of retirement success would fall to 55% or so.

Once you see how a major setback might affect your retirement prospects, you can consider ways to protect yourself. For someone like our fictional 45-year-old above, switching to a more conservative portfolio probably isn’t the answer since doing so would also lower long-term returns, perhaps reducing the odds of success even more. Rather, a better course would be to consider saving more. And, in fact, by boosting the savings rate from 10% to 15%, the level recommended by many pros as a reasonable target, the post-crash probability of success rises almost to where it was originally.

If you’re closer to or already in retirement, however, the proper response to a precipitous drop in the odds of retirement success could be to invest more cautiously, perhaps by devoting a portion of your nest egg to an annuity that can generate steady, assured income. Or you may want to maintain your current investing strategy and focus instead on ways you can cut spending, should it become necessary, so you can withdraw less from your portfolio until the markets recover.

Truth is, there’s a whole range of actions you might take—or at least consider—that could put you in a better position to weather a market crash (or, for that matter, provide a measure of protection against other setbacks, such as job loss or health problems). But unless you go through this sort of stress test, you can’t really know what effect a big market setback might have on your retirement plans, or what steps might be most effective.

So run a scenario or two (or three) now to see how you fare, assuming different magnitudes of losses and different responses. Or you can just wait until the you know what hits the fan, and then scramble as best you can.

Walter Updegrave is the editor of RealDealRetirement.com. If you have a question on retirement or investing that you would like Walter to answer online, send it to him at walter@realdealretirement.com.

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MONEY best of 2014

6 New Ideas That Could Help You Retire Better

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MONEY (photo illustration)—Getty Images (2)

A great new retirement account, the case for an overlooked workplace savings plan, a push to make your town more retiree-friendly, and more good news from 2014.

Every year, there are innovators who come up with fresh solutions to nagging problems. Companies roll out new products or services, or improve on old ones. Researchers propose better theories to explain the world. Or stuff that’s been flying under the radar finally captivates a wide audience. For MONEY’s annual Best New Ideas list, our writers searched the world of money for the most compelling products, strategies, and insights of 2014. To make the list, these ideas—which cover the world of investing, technology, health care, real estate, college, and more—have to be more than novel. They have to help you save money, make money, or improve the way you spend it, like these six retirement innovations.

Best Kick-Start for Newbies: The MyRA

Half of all workers—and three-quarters of part-timers—don’t have access to an employer-sponsored retirement plan like a 401(k). The new MyRA, highlighted in President Obama’s State of the Union address in January, will fill in the gap, helping millions start socking away money for retirement. Even if you are already well on your way to establishing your retirement nest egg, you could learn something from this beginner’s savings account.

The idea: The MyRA, rolling out in late 2014, is targeted at workers without employer plans. Like a Roth IRA, the contributions aren’t tax-deductible, but the money grows tax-free. Savers fund a MyRA via payroll deductions, with no minimum investment and no fees.

What’s to like about this baby ira: The MyRA’s investments, modeled after the federal government’s 401(k)-like Thrift Savings Plan, emphasize safety, simplicity, and low costs. Those are principles more corporate plans—and individual savers—should embrace.

Best Workplace Plan That’s Finally Come of Age: The Roth 401(k)

With a 401(k), you sock away pretax money for retirement and then pay taxes when you withdraw the funds. With a Roth 401(k), you do the opposite: take a tax hit upfront but never owe the IRS a penny again. Few workers take advantage of this option. Now that could be changing.

This year Aon Hewitt reported that for the first time, 50% of large firms offer a Roth 401(k), up from 11% that did so in 2007. Adoption levels—still only 11%—tend to pick up once plans have a Roth on the menu for several years and new hires start signing up, Aon Hewitt reports.

A recent T. Rowe Price study found that even though young workers who expect to pay higher taxes in the future reap the greatest benefit, savers of almost every age collect more income in retirement with a Roth 401(k). A 45-year-old whose taxes remain the same at age 65 would see a 13% income boost, for example. And, notes ­Stuart Ritter, senior financial planner at T. Rowe Price, “the ­money in a Roth is all yours.”

Best New Defense Against Running Out of Money

When the only retirement plan you have at work is a 401(k), you may yearn for the security you would have gotten from monthly pension checks. Pensions aren’t coming back, but the government is letting 401(k) plans be more pension-like. A rule tweak by the Department of Labor and the IRS should make it easier for employers to incorporate deferred annuities into a 401(k)’s target-date fund, the default retirement option for many. Instead of a portfolio of just stocks and bonds that grows more conservative, target-date savers would have a portion of their funds socked into a deferred annuity, which they could cash out or convert to a monthly check in retirement. Done right, the system could re-create a long-missed pension perk, says Steve Shepherd, a partner at the consulting firm Hewitt EnnisKnupp. “They are making it easier and more cost-effective to lock in lifetime income.”

Best Supreme Court Ruling

In June the Supreme Court issued a ruling that makes it easier for Fifth Third employees to sue the bank over losses they suffered from holding company stock in their 401(k)s. The share price fell nearly 70% during the financial crisis. By discouraging companies from offering stock in plans in the first place, the unanimous decision could help 401(k) savers everywhere.

For years—and especially since the 2001 Enron meltdown—experts have advised against holding much, if any, company stock in your retirement plan. Still, not everyone has gotten the memo. About 6% of employees have more than 90% of their 401(k)s in company stock, the Employee Benefit Research Institute reports. About one in 10 employers still require 401(k) matching contributions to be in company shares, according to Aon Hewitt, a benefits consulting company.

With heightened legal liability, that could finally change. The upshot, according benefits lawyer Marcia Wagner, is that fewer employers will offer their own stock in their 401(k)s. “It’s risky for them now,” she says. That’s “a tectonic shift.”

Best New Book on Retirement

You may think you’ve heard a lot the looming retirement crisis. Well, it’s worse than you think. That’s the message of a new book, Falling Short, written by retirement experts Charles Ellis, Alicia Munnell, and Andrew Eschtruth.

One of their main targets is the 401(k), whose success depends on an unlikely combo of investor savvy, disciplined saving and great market returns. As things stand now half of Americans may not be able to maintain their standard of living in retirement. Their prescription? Don’t wait for Washington to fix things. Save as much as you can, work longer, and delay Social Security to increase your benefits.

Best New Idea About Where to Retire

Whether you can stay in your home after you retire is as much about where you live as it is about your house. Yes, there are inexpensive changes you can make to age-proof your home, but is your town a good place to age? AARP is helping people answer that question. Through its Network of Age-Friendly Communities, AARP is working with dozens of cities and towns to help them adopt features that will make their communities great places for older adults. Those include public transportation, senior services, walkable streets, housing, community activities, job opportunities for older workers, and health services.

Nearly half of the 41 places that have joined the network signed on in 2014, including biggies such as San Francisco, Boston, Atlanta, and Denver. Membership requires a commitment by the community’s mayor or chief executive, and communities are evaluated in a rigorous program that is affiliated with the World Health Organization’s Age Friendly Cities and Communities program and is guided by state AARP offices. This spring, AARP will launch an online index rating livability data about every community in the U.S.

MONEY IRAs

The Best Way to Tap Your IRA In Retirement

Ask the Expert Retirement illustration
Robert A. Di Ieso, Jr.

Q: I am 72 years old and subject to mandatory IRA withdrawals. I don’t need all the money for my expenses. What should I do with the leftover money? Jay Kahn, Vienna, VA.

A: You’re in a fortunate position. While there is a real retirement savings crisis for many Americans, there are also people with individual retirement accounts (IRAs) like you who don’t need to tap their nest egg—at least not yet.

Nearly four out of every 10 U.S. households own an IRA, holding more than $5.7 trillion in these accounts, according to a study by the Investment Company Institute. At Vanguard, 20% of investors with an IRA who take a distribution after age 70 ½ put it into another taxable investment account with the company.

The government forces you to start withdrawing your IRA money when you turn 70½ because the IRS wants to collect the income taxes you’ve deferred on the contributions. You must take your first required minimum distribution (RMD) by April of the year after you turn 70½ and by December 31 for subsequent withdrawals.

But there’s no requirement to spend it, and many people like you want to continue to keep growing your money for the future. In that case you have several options, says Tom Mingone, founder and managing partner of Capital Management Group of New York.

First, look at your overall asset allocation and risk tolerance. Add the money to investments where you are underweight, Mingone advises. “You’ll get the most bang for your buck doing that with mutual funds or an exchange traded fund.“

For wealthier investors who are charitably inclined, Mingone recommends doing a direct rollover to a charity. The tax provision would allow you to avoid paying taxes on your RMD by moving it directly from your IRA to a charity. The tax provision expired last year but Congress has extended the rule through 2014 and President Obama is expected to sign it.

You can also gift the money. Putting it into a 529 plan for your grandchildren’s education allows it to grow tax free for many years. Another option is to establish an irrevocable life insurance trust and use the money to pay the premiums. With such a trust, the insurance proceeds won’t be considered part of your estate so your heirs don’t pay taxes on it. “It’s a tax-free, efficient way to leave more to your family,” Mingone says.

Stay away from immediate annuities though. “It’s not that I don’t believe in them, but when you’re already into your 70s, the risk you’ll outlive your capital is diminished,” says Mingone. You’ll be locking in a chunk of money at today’s low interest rates and there’s a shorter period of time to collect. “It’s not a good tradeoff for guaranteed income,” says Mingone.

Beyond investing the extra cash, consider just spending it. Some retirees are reluctant to spend the money they’ve saved for retirement out of fear of running out later on. With retirements that can last 30 years or more, it’s a legitimate worry. “Believe it or not, some people have a hard time spending it down,” says Mingone. But failure to enjoy your hard-earned savings, especially while you are still young enough and in good health to use it, can be a sad outcome too.

If you’ve met all your other financial goals, have some fun. “There’s something to be said for knocking things off the bucket list and enjoying spending your money,” says Mingone.

Update: This story was changed to reflect the Senate passing a bill to extend the IRS rule allowing the direct rollover of an IRA’s required minimum distribution to a charity through 2014.

Do you have a personal finance question for our experts? Write to AskTheExpert@moneymail.com

Read next: How Your Earnings Record Affects Your Social Security

MONEY 401(k)s

This New Retirement Income Solution May Be Headed for Your 401(k)

Target-date mutual funds in 401(k)s can now add an annuity feature, which will provide lifetime income in retirement.

The stunningly popular target-date mutual fund is getting a facelift that promises to cement it as the premier one-stop retirement plan. By adding an automatic lifetime income component, these funds may now take you from cradle to grave.

Last month the federal government blessed new guidelines, on the heels of initial guidance last summer, which together allow savers to seamlessly convert 401(k) assets into guaranteed lifetime income. Specifically, the IRS and the Treasury Department will allow target-date mutual funds in 401(k) plans to invest in immediate or deferred fixed annuities. Plan sponsors can choose to make these target-date funds the default option, meaning workers would have to opt out if they preferred other investments.

Target-date funds are widely considered one of the most innovative investment products of the past 20 years. They automatically shift to a more conservative asset allocation as you age, starting with around 90% stocks when you are young and moving to around 50% stocks at age 65. By simplifying diversification and asset allocation, target-date funds have become 401(k) stalwarts.

They have broad appeal and are a big factor in the rising participation rate of workers, and of younger workers in particular. Nearly half of all 401(k) contributions go into target-date funds, a figure that will hit 63% by 2018, Cerulli Associates projects. By then, Vanguard estimates that 58% of its plan participants and 80% of new plan entrants will be entirely in target-date funds. In all, these funds hold about $1 trillion.

The annuity feature stands to make them even more popular by closing an important loop in the retirement equation. Now, at age 65 or so, a worker may retire with a portion of their 401(k) automatically positioned to kick off monthly income with no threat of running out of money. In simple terms, a target-date fund that has moved from stocks to bonds as you near retirement may now move from bonds to fixed annuities at retirement, easing concerns about outliving your money and being able to meet fixed expenses.

Policymakers have been working towards this kind of solution for the past several years, but have hit a variety of stumbling blocks, including tax and eligibility issues and others having to do with a plan sponsor’s liability for any guarantees or promises it makes through its 401(k) investment options. There are still implementation problems to be worked out, so few plans are likely to add annuities right away. But the new federal guidelines clarify the rules for employers and pave the way for broader acceptance of both immediate and deferred fixed annuities in 401(k) plans. And a guaranteed lifetime income stream is something that workers are clearly looking for in retirement.

More on 401(k)s from Money’s Ultimate Retirement Guide:

Why is a 401(k) such a good deal?

How should I invest in my 401(k)?

What if I need my 401(k) money before I retire?

Read next: Flunking Retirement Readiness, and What to Do About It

MONEY retirement income

The Search for Income in Retirement

Why we may be focusing too much on our nest egg and not enough on cash flow.

There are three components to retirement planning: accumulation, investment, and managing for income. And while we are usually more fixated on “the number” on our balance sheet, the bigger challenge is ensuring that a retirement portfolio can generate enough steady money as we live out our days.

In a recent academic panel hosted by the Defined Contribution Institutional Investment Association (DCIIA), professors Michael Finke of Texas Tech and Stephen Zeldes of Columbia University illustrated the challenge of getting into an income mindset by discussing what’s known as the “annuity puzzle.”

If people were to take their 401(k)s and convert them into annuities, they would get a lifetime income stream. And yet very few people actually annuitize, in part because they don’t want to lose control over their hard-earned savings. “Getting people to start thinking about their retirement in an income stream instead of a lump sum is a big problem,” Finke told the audience.

Also at play is the phenomenon of present bias, whereby half a million dollars today sounds a lot better than, say, $2,500 a month for the rest of your life. This is a major knowledge gap that needs to be addressed. A new survey of more than 1,000 Americans aged 60-75 with at least $100,000 conducted for the American College of Financial Services found that of all of the issues of financial literacy, respondents were least informed about how to use annuities as an income strategy. When asked to choose between taking an annuity over a lump sum from a defined benefit plan in order to meet basic living expenses, less than half agreed that the annuity was the better choice.

Granted, annuities are complicated products. In the past, they got a bad rap for not having death benefits and otherwise misleading investors, but the industry has evolved, and there are now so many different options that it would be quite an undertaking to wade through and understand them all. And annuities aren’t the only way to generate income. Another option people might want to consider is a real estate investment that can throw off consistent revenues from rent. The point is to start thinking more not just about accumulating money but about how you can make that money work for you by turning it into an income-producing asset.

In the meantime, academics like Zeldes are working on how to make annuitization more appealing. In a paper published in the Journal of Public Economics in August 2014, Zeldes and colleagues suggest that people are more likely to annuitize if they can do so with only part of their nest egg, and even a partial annuity can be better than no annuity at all. Zeldes also found that people prefer an extra “bonus” payment during one month of the year, which means that they essentially want their annuity to seem less annuity-like. I’m all for product innovation, but in this case I think we’d be better off learning the value of a steady stream—especially over a fake “bonus.”

Konigsberg is the author of The Truth About Grief, a contributor to the anthology Money Changes Everything, and a director at Arden Asset Management. The views expressed are solely her own.

Read more about annuities in the Ultimate Retirement Guide:
What is an immediate annuity?
What is a longevity annuity?
How do I know if buying an annuity is right for me?

MONEY retirement income

The Powerful (and Expensive) Allure of Guaranteed Retirement Income

141203_RET_Guaranteed
D. Hurst—Alamy

Workers may never regain their appetite for measured risk in the wake of the Great Recession, new research shows.

People have always loved a sure thing. But certainty has commanded a higher premium since the Great Recession. Five years into a recovery—and with stocks having tripled from the bottom—workers overwhelmingly say they prefer investments with a guarantee to those with higher growth potential and the possibility of losing value, new research shows.

Such is the lasting impact of a dramatic market downdraft. The S&P 500 plunged 53% in 2007-2009, among the sharpest declines in history. Housing collapsed as well. Yet the S&P 500 long ago regained all the ground it had lost. Housing has been recovering as well.

Still, in an Allianz poll of workers aged 18 to 55, 78% said they preferred lower certain returns than higher returns with risk. Specifically, they chose a hypothetical product with a 4% annual return and no risk of losing money over a product with an 8% annual return and the risk of losing money in a down market. Guarantees make retirees happy.

This reluctance to embrace risk, or at least the urge to dial it way back, may be appropriate for those on the cusp of retirement. But for the vast majority of workers, reaching retirement security without the superior long-term return of stocks would prove a tall order. Asked what would prevent them from putting new cash into a retirement savings account, 40% cited fear of market uncertainty and another 22% cited today’s low interest rates, suggesting that fixed income is the preferred investment of most workers. Here’s what workers would do with new cash, according to Allianz:

  • 39% would invest in a product that caps gains at 10% and limits losses to 10%.
  • 19% would invest in a product with 3% growth potential and no risk of loss.
  • 19% would invest in a savings account earning little or no interest.
  • 12% would hold their extra cash and wait for the market to correct before investing.
  • 11% would invest in a product with high growth potential and no protection from loss.

These results jibe with other findings in the poll, including the top two concerns of pre-retirees: fear of not being able to cover day-to-day expenses and outliving their money. These fears drive them to favor low-risk investments. One product line gaining favor is annuities. Some 41% in the poll said purchasing such an insurance product, locking in guaranteed lifetime income, was one of the smartest things they could do when they are five to 10 years away from retiring.

Lifetime income has become a hot topic. With the erosion of traditional pensions, Social Security is the only sure thing that most of today’s workers have in terms of a reliable income stream that will never run out. Against this backdrop, individuals have been more open to annuities and policymakers, asset managers and financial planners have been searching for ways to build annuities into employer-sponsored defined-contribution plans.

Doing so would address what may be our biggest need in the post defined-benefits world and one that workers want badly enough to forgo the stock market’s better long-run track record.

More from Money’s Ultimate Retirement Guide:

How do I know if buying an annuity is right for me?

What annuity payout options do I have?

How can I get rid of an annuity I no longer want?

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