(Not so much) money for life

Wall Street just knocked my 401(k) back to 2005.

One of the results is ironic. I never imagined how disappointed I would be to have saved a quarter million dollars, which is what’s left after the market meltdown. But it is scary too. I’m too close to retirement age to make up the difference with more aggressive investments. And my wife and I both come from long-lived families, which seems likely to stretch our savings thinner.

So, what to do? We’ve been looking into annuities to help make the stretch. On the plus side, they offer additional lifetime income to supplement Social Security and some pension benefits for which I will qualify. On the minus side, there will be more restrictions on withdrawing funds if I need them in the next few years and taxes on those withdrawals will be higher than the capital gains we’ll pay on some of our other investments. Plus, if we aren’t careful, the rules for minimum required distributions from our retirement plans that will kick in eight to 10 years from now could force us to pull out too much money to maintain the lifetime income guarantee.

One of the variable annuities I’m looking at promises a minimum 7 percent growth in my account, until I start withdrawing money, regardless of what the market does. A financial planner friend points out, correctly, that this is a relatively good deal when markets are high, but not so good when markets are down. I risk missing more of the rebound when things turn around. I agree in theory. But part of me also wonders what if this is ‘up’ right now? The recessions following the 1970s oil shock, the 1980s monetary crises and the 1990s dot-com bust all lasted two years. This one seems scarier, especially from the front row seats.

So are annuities a good deal? Maybe, maybe not, says the Securities and Exchange Commission. It depends on your circumstances. The Insurance Information Institute can walk you through some of the procedural basics. SmartMoney.com outlines some basic arguments for and against. And, more recently, bloggers on both fivecentnickel.com and Blueprint for Prosperity have talked about recent changes in the contracts you may want to check out.

Meantime, there is one highly speculative potential retirement income investment allocation we haven’t changed at our house. We still blow $1 a week on a Powerball ticket.