Do-it-yourself retirement income

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(MoneyWatch) Baby-booomers who are retiring with only their 401(k) balances to live on and no lifetime pension benefits face a daunting challenge: How do you turn your 401(k) funds into a retirement paycheck that lasts for the rest of your life?

As I previously wrote, the good news that many 401(k) plan sponsors are considering adding retirement income options to their plans in which the plan sponsor shops for viable products and services that will help participants generate a retirement paycheck. But the flip side is that more than half of all 401(k) plan sponsors won't be adding any retirement income options to their plans anytime soon. If you're in that boat, don't despair -- you still have two effective ways to develop a long-lasting retirement paycheck:

1. Generate a retirement paycheck directly from your employer's 401(k) plan, or
2. Roll your balances into an IRA that offers effective retirement income solutions.

In this post, I'll describe the first option; my next piece will describe the rollover solution.

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Getting a retirement paycheck from your employer's 401(k) plan

This option can be effective if your employer's 401(k) plan includes low-cost index funds that are balanced between stocks and bonds -- target date funds are a good example of this type of fund. Look for funds whose annual investment expenses are well below 50 basis points (0.50 percent). New 401(k) fee disclosure rules can help you more easily make this determination. Whatever you do, resist the temptation to use actively managed, high-cost funds that shoot for exceptional returns (My CBS MoneyWatch colleagueLarry Swedroe has demonstrated repeatedlythat this is a loser's game.)

Most 401(k) plans allow you to take installment payments when you retire instead of getting a lump-sum check for the value of your entire account balance. These installments are typically paid either monthly or quarterly. All you have to do is tell your 401(k) plan administrator the amount of each installment payment you want, either in dollar terms or as a percentage of your account balance, and specify the investment funds from which the payments will be made. You can make it easy on yourself by having the payments sent electronically to your checking account.

You'll want to be cautious in determining the amount of each installment payment -- withdraw too much money early in your retirement and there's a good chance you'll outlive your savings. Determining a safe withdrawal amount is the subject of much debate and analysis among financial writers and analysts. My prior post provided simple guidelines for determining appropriate withdrawal amounts, including satisfying the required minimum distribution (RMD) rules once you reach age 70-1/2. (If you have the mathematical appetite for digesting the best thinking on safe withdrawal rates, check out financial expert Wade Pfau's excellent Retirement Researcher blog.)

You should know, however, that even with supposedly safe withdrawal rates, there's always the chance that you'll outlive your savings if you live well past your projected life expectancy or if there are severe economic meltdowns in your future. If you really want the guarantee of a lifetime retirement income, no matter how long you live, then you'll need to buy an annuity from an insurance company. If that's not offered in your 401(k) plan, you'll need to use the IRA rollover solution, which is the subject of my next post.

Bottom line: Most boomers will be on their own to turn their 401(k) balances into lifetime retirement income. It's a challenge you should take seriously, but you don't need to be paralyzed from fear, either. A few simple steps can help you take charge of your retirement security.

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    Steve Vernon helped large employers design and manage their retirement programs for more than 35 years as a consulting actuary. Now he's a research scholar for the Stanford Center on Longevity, where he helps collect, direct and disseminate research that will improve the financial security of seniors. He's also president of Rest-of-Life Communications, delivers retirement planning workshops and authored Money for Life: Turn Your IRA and 401(k) Into a Lifetime Retirement Paycheck and Recession-Proof Your Retirement Years.

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