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| The Basics | Whats better -- a monthly pension or a lump sum?
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How you take your retirement income can have a big impact on how long it lasts. Here's how to get the right mix. Plus: how to best use an inheritance.
By Scott Burns
Q: I've been told the vast majority of retirees in my company elect the lump-sum payment as opposed to a monthly pension -- to achieve greater flexibility and for a better chance of staying ahead of inflation. What is your take on lump sum versus assured monthly payment?
-- E.A., Spring, Texas
A: When stocks are soaring and yields are high, investing a lump sum looks really good. Everyone figures they can do better than a lifetime monthly income. In fact, it isn't so easy. Many who took lump sums when they retired a few years ago would love to go back and reverse that decision.
The best way to finance your retirement is to have both a lifetime pension and some flexible assets. This isn't a matter of indecision. Recent research indicates that turning a portion of your retirement assets into a lifetime income will increase the odds that you won't outlive your remaining portfolio.
And that's what everyone is worried about -- outliving their assets and income.
Writing in the Journal of Financial Planning, researchers John Ameriks, Robert Veres and Mark J. Warshawsky found that using 25% of your retirement assets to buy an annuity income increased the odds of portfolio survival somewhat.
Stop piddling away your inheritance
Q: I am a 25-year-old trying to find work and go back to school. Last year my aunt died and gave me a gift of $10,000. I know this is not much at all. I am under stress trying to find work and have not been able to do much research. I do not know what to do with the money. It is now sitting in a regular savings account. I have had to use the money occasionally for emergencies, and it's now down to $7,060.
Help! I do not want to have this money disappear. I would like to see it grow a bit, but I know nothing of investing. Any suggestions?
-- N.N., by e-mail
A: Don't worry about the interest. Focus on the big picture.
Has it occurred to you that $3,000 is a lot of emergencies to have in a year? Many people who inherit money piddle it away because they never ask themselves the three basic financial questions. Those questions are:- What is my condition this morning?
- What will it be tomorrow morning?
- What am I going to do today to make it different?
If you have no money coming in but know that you will be spending money in the next 24 hours, you will have less money by tomorrow morning. The only way to avoid this is to earn money. Otherwise, you will have to declare the day an "emergency" and take still more cash from your remaining $7,060.
I suggest that you make a plan about school and work. Then do your level best to stick to it. That plan may include spending some, or all, of the remaining $7,060 and any interest it might earn.
The biggest reality here is that it takes gigantic amounts of investment money to replace our earning power. That $7,000 might earn $210 a year at 3%. Invest the same money in your skills and it will earn $2,000 a year if it increases your wages by only $1 an hour. The most valuable asset you've got isn't $7,000: It's your ability to acquire new skills and earn more.
I'm sorry if this sounds harsh, but you would be amazed at the number of people who squander inheritances because they believe they can spend the same dollar at least twice. One of the rudest facts of life is an asymmetrical truth. While you are entirely correct that $10,000 "is not much at all" while you are spending it, most people find that $10,000 is a gigantic amount of money when they are trying to save it.
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MSN Money's editorial goal is to provide a forum for personal finance and investment ideas. Our articles, columns, message board posts and other features should not be construed as investment advice, nor does their appearance imply an endorsement by Microsoft of any specific security or trading strategy. An investor's best course of action must be based on individual circumstances.
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