Retirement planning: Just tell me what to do

(MoneyWatch) I constantly urge people to take the necessary time to plan for retirement, and I encourage people to hang in there. While it can take many hours to do the job right, it'll be worth it in the end.

In spite of my encouraging words, a common response I hear is, "Steve, just tell me what to do! I just don't have the time to figure it out. It's all Greek to me, and I don't want to screw it up."

This typical response has inspired me to create a new series of blog posts, where I'll describe some strategies you can use to generate a retirement paycheck that are simple to understand and implement. If you follow these strategies, you'll enjoy a retirement income that you can't outlive, while protecting a large part of your savings against inflation. I'll also offer some ideas to protect against things going wrong, such as market downturns and expensive bills for medical and long-term care. By following my tips, you'll also get a fair shake from the financial institutions you deal with. (Because it will take a few posts to describe these strategies, please stay tuned for more posts later this week.)

When it comes to generating retirement income, there's no single magic bullet that will provide the income you need. You'll need to piece together two to four retirement paychecks to help you achieve your financial goals: Social Security, pensions, retirement savings such as IRAs and 401(k) accounts, and employment. In this post, we'll take a look at the first two.

Social Security

Social Security is a great retirement paycheck source. It delivers a monthly retirement income that's guaranteed to last the rest of your life, no matter how long you live and no matter what happens in the economy. It's indexed for inflation, and part or all of your income is exempt from federal income taxes.

For these reasons, it's a good strategy to delay drawing Social Security benefits as long as you can, since your income is increased for each month you delay starting benefits after age 62. I recommend that you wait at least until age 66, the full retirement age for current retirees. Better yet, wait until age 70, when your Social Security income maxes out; there are no further increases for delaying Social Security after age 70.

If you're married, delaying your benefits works best for the main breadwinner in the family, typically the husband. It gets trickier when you're deciding when to start drawing the other spouse's Social Security income. But, in the spirit of giving "simple to follow" advice, here goes: If you two are roughly the same age, the secondary breadwinner should wait until they reach age 66 to begin their Social Security benefits. If there's a big difference in your ages, say three years or more, it's OK to start the spouse's Social Security income at age 62.

Your pension

If you're one of the lucky few who has a significant income from a defined benefit plan at work, you'll want to make the most of this valuable benefit. The strategies described here apply to traditional pension plans as well as newer plans such as cash balance or pension equity plans.

With these types of plans, you have the ability to receive a monthly income that's paid for the rest of your life, no matter how long you live. With most plans, your monthly income is fixed and won't increase for inflation; however, a few plans have some inflation protection.

My first piece of advice is this: If you're offered a lump sum payment instead of the monthly income option, decline this alternative. It will be very hard to take that lump sum and invest it in such a way that you'll generate a lifetime retirement income that's higher than the paycheck that's generated by the monthly income option. Resist claims by financial advisors who urge you to take the lump sum and invest it with them. There's a very good chance they can't deliver a higher lifetime retirement income.

Next, you should delay starting your pension benefits at least until you've hit the normal retirement age for the plan. Typically this is age 65, but a few plans max out benefits at an earlier age. With most plans, delaying your benefits will increase your monthly paycheck. With many plans, your income also increases if you delay commencement beyond the normal retirement age, so if you enjoy your work, consider this possibility as well.

Finally, if you're married, elect the joint and survivor payment option that continues income to your spouse after you pass away. I suggest choosing a continuation percentage of either 66-2/3, 75, or 100 percent (the 50-percent joint and survivor option doesn't provide enough protection to the surviving spouse). Resist claims by crafty insurance agents to take the life-only option and buy insurance to protect your spouse.

It's important to realize that with employer-sponsored defined benefit plans, your employer offers these plans only to benefit their employees. Your employer doesn't profit from these plans, and in fact your employer spends a lot of money to operate them on your behalf. Anybody else, whether an insurance agent or financial advisor, stands to profit if you invest with them. Your employer is more likely to have your best interests at heart.

That's it for these two sources of retirement income. See how simple that was?

How to maximize your Social Security payouts
Pension plan lump sum payments: Why you should avoid them

Stay tuned for my next post, which will cover generating a retirement paycheck from your IRA and 401(k), and working during your retirement years.

[LondonCA]

When it comes to retirement plan contributions, required minimum distributions (RMDs), estimated tax payments, year-end gifts, and so on. Don't wait until the last minute either before the end of the year or April 15th. Be sure to save all your receipts and keep organized records

[TomSeaver]

Steve, you declare that you want to give the best advice for folks to help them wind up with the most money at retirement but you seem to be limited by your knowledge and experience. As an Actuary who has designed retirement programs for large employers, of course you would be inclined to trust those type of programs primarily, but to give the best advice you must become more educated and present all the options. First, you stated that it is a bad idea, from 'Crafty Insurance Agents' to take the life-only payment option on a pension plan and couple that with a Life insurance policy on the Pensioner. If this policy is a cash-value policy that is guaranteed to provide the insurance payout at death as opposed to a term policy that will expire in a few years, then the amount of money that will become available to the surviving spouse at the death of the pensioner will be dramatically higher (as seen over the remaining lifetime) as compared to a pension payout of 66, 75 or even 100 percent. This policy would be paid for through designating a portion of the difference (greater monthly pension amount) that will be generated in a life-only pension settlement option as compared to the much lower monthly amount from a survivor option. The much higher total payout received from the insurance policy is also tax-free as compared to the monthly pension payments being taxed as ordinary income, and can go to the other family members if the surviving spouse dies prior to the Pensioner or shortly thereafter. Second, to portray financial advisers as predatory individuals because they stand to earn some income from their work as compared to the employer who earns nothing is also just fear-mongering. True, the employer should have the best interests of his employees at heart and often pays out lots to support a defined benefit pension plan (very rare these days) but that doesn't mean that the employer knows all the details about specific options or wishes the employee to maintain their monthly pension in lieu of a one-time payout, the employer should want whatever is in the best interest of the employee and that can be compared/appraised by a competent financial professional in advising the employee. It is true that most financial advisers want to take any one-time payout and invest that money in the stock market/equity markets in some form which does offer a significant element of risk to the accumulated nest-egg. There are options and advisers who offer guaranteed, risk free vehicles that give good growth and tax benefits to protect and further increase the hard earned assets of the client's nest-egg. Scrupulous and trained professionals can offer safe options and these should not be downplayed or avoided due to ignorance or prejudice.