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Playing It Too Safe

At the same time, colleagues also contemplating the buyout were coming up to me and saying, "My financial adviser promises me that I can earn an average of 10 percent a year if I put that money in the market." Tempting thought, that. Put the money in the market and keep earning more.

But I was worried about maintaining my cash flow. I didn't want to have my income drop immediately, what with bills to pay and debt to service based on what I had been earning. With the combination of pension, annuity and contract income, I would be earning slightly more than I had been. Facing a more uncertain short-term future than I had in many, many years, I found that comforting.

I also thought (feeling more than a little sophisticated, I confess), I already have more than twice the amount of the lump sum invested in the markets, so maybe I should take the annuity to better diversify my retirement income.

That's what I did, and that's where I went wrong, according to Stephen P. Utkus, principal in Vanguard's Center for Retirement Research.

Actually, Utkus shied away from using the word "wrong," as carefully nonjudgmental as a shrink. But he made me realize I had failed to look at a bigger issue: the balance between annuitized income, which is guaranteed, and asset income, which can fluctuate with the markets.

With the combination of my pension, my anticipated Social Security and the annuity, I have a high level of annuitization for someone with my level of affluence, he said. "But that may fit your risk tolerance. . . . Some people will say, 'The only guaranteed income I need is Social Security,' " he said. "At the other extreme are people who annuitize 99 percent of their wealth."

There are three factors that help decide how to balance guaranteed income with income from assets. One is, how much and what types of risk you can tolerate. "Some people prefer certainty. Other people prefer control," Utkus said, even though it carries the risk of investments going bad and people outliving their income. That won't happen with annuities, although inflation will erode their value.

Another factor is whether leaving something to your spouse or kids or a charity matters. If so, then you don't want to annuitize all your money.

The third factor is flexibility. If unexpected expenses crop up, you can't speed up your annuity payments to cover them.

In my case, 81 percent of my income sources going forward are annuitized, with the remaining 19 percent coming from assets, according to Utkus's analysis. His assessment assumed that in the first year I took distributions from my savings accounts I drew an amount equal to 4.5 percent of my assets. That dollar amount would be adjusted thereafter by the change in the cost of living.

His analysis did not include real estate holdings, which in my case means two homes. Down the road, I could sell one if I needed the money for unforeseen reasons or if I wanted to invest it in the markets.

"I think I probably would not have annuitized, because you have so much annuity income," he said. If he had decided to annuitize the money, he said, he would have done so with an inflation-adjusted annuity. Although the initial payout is smaller than for a fixed-income annuity, it protects against price increases. Still another approach I could have taken would have been to annuitize part of the lump sum at the time of the buyout and then invest the rest, let it grow (with luck) and then eventually buy another annuity.

Utkus told me something else that's important for women to know about annuities. Commercial annuities pay women less because we tend to live longer than men. But "qualified plans" such as pensions are required to be gender-neutral when they annuitize.

That means a woman generally will do better with an annuity paid under a qualified pension plan than with a commercial annuity. (Men, conversely, may not do as well opting for a company plan over a commercial annuity.) This is important because some employers offer workers a choice between monthly pension payments or a lump sum. A woman who takes the lump sum, planning to buy an annuity later, probably will be getting a worse deal.

My annuity was an addendum to The Post's pension plan, so at least I didn't take that hit.

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