by Archie M. Richards, Jr., CFP^®
March 12, 2001

Mickey suggests a method of funding retirement income from mutual fund accounts. The capital never runs out, he says, if you simply pay out less than the annual return. If the mutual funds gain 12 percent during the year (including dividends and gains) and you pay out 10 percent, you have a fine income and the capital continues growing for the eventual benefit of the children. Mickey, who's retired, has been doing this for three years with good results. The mutual funds lost money last year, but because they're still ahead from the two previous years, he did not reduce the withdrawals.

High payouts work fine, Mickey, as long as there are good gains. But when the accounts have losses, as they did last year - and you don't want to exhaust the capital - you should at least reduce the income and maybe even remove nothing.

I happen to believe that the stock market will bottom soon, and certainly by summer. I also expect good markets in the next couple of decades. But let's say I'm wrong. Let's say that stock prices fall sharply this year and next. If you continue to remove high levels of income, you couldn't count on a net growth of capital, and you might outlive the capital altogether.

By the way, since you don't know what this year's returns are going to be, you'd be wise to base this year's withdrawals on last year's returns.

To change the scenario, dear reader, let's say that you and your spouse have $100,000 in a thrift savings plan, and you're just starting retirement. You don't mind using up your capital during your lives, but the possibility of outliving your money makes you lose sleep at night. What should you do?

Buy an immediate annuity.

Annuities are the opposite of life insurance. A life insurance policy pays after you die. An annuity keeps on paying until you die. Insurance companies are good at guessing when people will kick off. They don't know when you and your spouse will go, of course, but they have data for many people of your ages and health and can estimate the group's longevity accurately.

Okay, you fork over $100,000 to the insurance company. You also "annuitize" the policy right off, meaning that you direct the company to begin making payments to you immediately.

Insurance companies offer many payment formulas. The simplest is a single-life annuity, whereby the company pays a level amount for the rest of your life. If you live to age 110, the insurance company loses a ton of money. If you die after only a year, the company profits hugely. Overall, you want the insurance company to make a profit, so it doesn't go busted and leave everyone in the lurch.

There's a problem with the single-life annuity. If you watch so much television that you turn into an enormous Brussels sprout and die in only eighteen months, the payments would come to screeching halt, and your spouse would be left destitute with no income. Bad idea.

Alternatively, you could choose a joint-life annuity. Here, the company makes level payments for as long as ye both shall live. That's more like it. Since both of you will have greater longevity than either one of you, the annuity payments would be less than those of a single-life annuity.

You could choose a joint-life annuity with the payments reduced by 50 percent after the death of the first spouse to die. Or you could choose a joint-life annuity with payments made for ten years in any event. The latter approach means that if you should both die prematurely, the payments would continue to your beneficiaries for up to ten years. Ask the company about other possibilities. No matter what your choice, after the payments begin, you cannot change your mind.

From www.immediateannuity.com, I obtained a phone number (800-872-6684) and asked for a quote for a $100,000 immediate annuity for a male age 65 and female age 63, residents of Texas . For their joint lives, they would receive $667 a month. For their joint lives with 50% to the survivor, they'd receive $748 a month, with payments to the survivor falling by half to $374. The insurance company for that particular quote is highly rated, which is desirable.

The returns from immediate annuities are modest, but at least you can't outlive your money.