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Develop a plan for funds to last in retirement

The Baltimore Sun

You may easily survive 30 years after retirement. Will your money?

With life expectancies climbing, so are fears about outliving savings. And as traditional defined-benefit pension plans wane, insurers are rushing new longevity-based products to the market.

Of course, no one should buy any of these products without first mapping out a strategy that identifies what you will need so you don't end up with policies ill-suited to your situation.

"You basically want to try to replicate a defined-benefit pension" in a 401(k) world, said Moshe Milevsky, a finance professor at Toronto's York University.

On the most basic level, Milevsky said, workers need to assess their income needs in retirement, match that to guaranteed forms of income such as Social Security and pension payments and then consider guaranteed products such as annuities to make up for the difference. Any remaining funds can be invested to pay for extras beyond those basic needs.

Sounds easy, but it rarely is. Forecasting how much you'll need 20 or 30 years from now, for starters, is a highly complex task.

But what if you could break that period down to more manageable stints, covering each phase of retirement with its own money-management strategy?

Some companies are moving in that direction. One such program is the 10-step lifestyle income approach, a strategy from insurer Northwestern Mutual. An article detailing the program is being reviewed for publication in a coming issue of the Journal of Financial Planning.

The plan involves taking care of the final phase of retirement - old age - first, then investing 60 percent of the remaining assets for the beginning phase and the remaining 40 percent for the middle phase.

Chuck Robinson, Northwestern senior vice president for investment products and services, who authored the strategy, recommends getting long-term-care, life insurance and estate planning needs assessed sometime between ages 45 and 65.

During this phase, determine a portion of the nest egg that will go toward paying living expenses in old age, say, after age 85. That figure - Robinson used six times the targeted annual desired income - is "carved out" of any 401(k) rollover at retirement and invested, with a 20-year time horizon for growth.

Between ages 65 and 75, younger retirees have the option to make midcourse corrections. If the stock market takes a brutal turn, for example, they can cut spending to make sure they don't overspend their income bridge for this time period.

From 75 to 85, the money not used for the first income bridge and for the old-age annuity can be used to fund living expenses, Robinson said.

Finally, at roughly 85, retirees can evaluate what's left. If their initial money carved out for this time period has performed well, chances are the person won't need an annuity.

If the person is healthy, but the set-aside money hasn't performed well, it will at least fund an immediate annuity that will offer a guaranteed monthly benefit for whatever lifetime the person has left.

Robinson said the company plans to roll out a calculator by the end of the year that will help consumers plug their own numbers into the strategy. The full strategy has several layers of complexity that can make adjustments depending on a person's tax situation or desire to leave an inheritance.

Like the idea but want to get rid of even more market risk? You might look at buying longevity insurance at an earlier stage to cover the final years with a guaranteed income stream.

For example, a 65-year-old male retiring with a 401(k) of about $300,000 might consider a longevity insurance policy that would cost about 10 percent of that nest egg, or $30,000. He would qualify for lifetime monthly payments of $2,200, or $1,250 with a death benefit, starting at age 85 through MetLife's retirement income insurance policy, company officials said.

The key is building contingency plans into your retirement investing and dedicating a portion of your assets to risk-free alternatives, Milevsky said.

And to minimize the risk of picking a bad risk-management plan, stick with triple A or double A-rated insurance providers, pay a premium if necessary to diversify policies among a few providers and look for flexibility and cost-of-living adjustments in any long-term plan, he said.

Finally, remember to balance your desire for protection with the cost, said Barbara O'Neill, a certified financial planner and Rutgers University retirement planning expert.

"The financial-services industry is really targeting the baby-boom generation," she said. "Everybody wants to get their hands on those rollovers."

Have a retirement question? Write to Your Money, Chicago Tribune, Room 400, 435 N. Michigan Ave., Chicago, IL 60611. If your letter is selected we may include you and your question in a future column.

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