Playing It Too Safe

By Martha M. Hamilton
Sunday, December 10, 2006

Okay. This week we learn from my mistakes.

Last summer, after getting an early retirement offer from The Washington Post, I had 45 days to decide what to do. That's not much time to figure out your financial future, especially if you're inexpert in these matters.

The decision to take the buyout turned out not to be that tough, in part because I had the chance to write this column under contract. But the next decision -- how to take the money -- was harder, and that's where I screwed up.

The buyout terms were relatively generous: a lump sum equal to two years' pay, modest health-care insurance and a chance to start drawing a full pension immediately rather than waiting till age 65.

The big question involved what to do with the lump sum. Should I take the money and spend it? Should I invest it in the markets? Or should I put it into an annuity?

Okay, stick with me now while I explain a little about annuitiezzzzzzzzz.

Annuities come in several flavors, but for today's purposes, we're only talking about an income annuity: You give an insurer a lump sum, and that insurer promises monthly payments for the rest of your life (or sometimes your survivor's life).

It's essentially both a bet on and a hedge against longevity: If you live long enough you'll recover far more than the lump sum. In any event, you won't outlive the income.

In many ways, an annuity resembles an employer-provided pension, which also promises monthly benefits for the employee's life. But there is one important difference. A company pension typically covers a large universe of folks, including some who -- sadly for them but happily for others in the plan -- will die young, leaving the money accrued toward a pension behind to help pay off others.

Commercially available annuities, on the other hand, generally attract a crowd that expects to live a long time; that means the payout often is smaller than it would be for a company pension.

As I considered what to do with the lump sum, I thought the income annuity option offered by The Post looked pretty good. I plugged the lump sum amount into an online calculator and the payout appeared to be somewhat better than what was available commercially.

I figured I could get the lump sum back in a little under 14 years, or at age 74. Given that my mother is 93, I'm betting I'll be collecting those checks for a long time to come. On the downside, the sum would be less meaningful after 14 years because it doesn't adjust for inflation.

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