Dear Liz: I am 54 and considering retiring in three or four years. I have been fortunate to work at a Fortune 100 company for 30-plus years and have both a defined benefit pension plan and a 401(k). When I retire, we have the option of taking a lump sum or an annuity. Most financial people I talk to strongly recommend taking the lump sum, though I wonder if it is not just so there is more money to manage? My current inclination is to take the annuity (with survivor benefit for my wife). I think we can live off the annuity alone and use the 401(k) for emergency/fun/help-the-kids money, etc. I think if I took the lump sum and invested it, I'd always worry about what the market was doing. Am I off base?
Answer: Not at all.
Theoretically, you often can make more money by taking a lump sum and investing it than by accepting the annuity, which offers a lifetime stream of payments. But perhaps you've heard the quote "In theory, theory and practice are the same; in practice, they are not." Anyone who knows much about behavioral finance knows there are many, many ways such a plan can go wrong.
You could pick the wrong investments, take too much or too little risk, trade too much or spend too much, and wind up much worse off than if you'd chosen the annuity. You could turn over the investing decisions to a pro, but there's no guarantee that person won't make mistakes. Even if he or she chooses great investments and allocates your assets well, your nest egg could still take a hit from the market.
If you were comfortable taking that extra risk to get the extra possible reward of more cash, accepting the lump sum would be the way to go. Since you're not, there's nothing wrong with taking the annuity. Opting for a survivor's benefit means your wife will have guaranteed income should you die first.
Before you pull the plug at work, though, make sure you talk to a fee-only planner who charges by the hour to make sure your retirement plan makes sense. (Planners paid by the hour won't have a vested interest in how you opt to manage your retirement funds.) Your assets probably will have to last 30 or 40 years, and you'll have to figure out how to pay for the ever-escalating cost of health insurance. This can be a tricky process, so you'll want expert, unconflicted help.
Unpaid federal student loans stay on credit reports
Dear Liz: My daughter graduated from college seven years ago and moved to London. She has not paid her student loans. Do they drop off her credit reports like other unpaid debt? What about the government's ability to collect? Does that expire as well?
Answer: The government can pursue people who owe federal student loan debt to their graves. There is no statute of limitations for collections activity, as there is on most other debt. Furthermore, the government has powers any private collection agency would envy. The feds can seize tax refunds, garnish wages without a court order and even take a portion of a debtor's Social Security checks.
Your daughter shouldn't expect the unpaid debt to vanish from her credit reports either. The federal Fair Credit Reporting Act limits the length of time other negative marks can remain, but that doesn't apply to federal student loans.
The Fair Credit Reporting Act "is silent as it pertains to government-guaranteed student loans," said credit expert John Ulzheimer, president of consumer education at CreditSesame.com. "The Higher Education Act allows them to remain on credit reports as long as they're unpaid."
There are so many affordable repayment options these days for federal student loans that it makes little sense to default. In cases of extreme hardship or low income, payments can be reduced to zero and the loans would still be considered current.
Your daughter needs to make arrangements to pay what she owes, especially if she ever plans to come home. The good news is that the Department of Education will work with her to get her loans out of default status, and clear up her credit, with an affordable payment program. She can start by visiting the department's site at studentaid.ed.gov.