Oct 18, 2008 8:42 pm US/Pacific
Time To Cash Out?
QUESTION: I am retired and have an IRA with John Hancock. It is not FDIC insured. In the last few months, I have lost 40 thousand. I do receive a monthly check from this fund. I have spoken with my advisor who says to just leave it in and in the event we lose it all, I would still receive my monthly check for life. Since I am retired, I will never be able to make this money up and obviously do not want to lose it.
ANSWER: It sounds as if the annuity you have through John Hancock has what is known as a "Living Benefit" rider. Insurance companies designed this type of product to provide a safety net to those people wanting to "insure" their income in retirement. Within your account you pay a fee for this protection. I assume the amount of income you need to generate from your account greatly exceeds what can be earned in a certificate of deposit at 3%. If you are taking a distribution greater than what a CD can earn, using a CD as your investment of choice will guarantee your running out of money. I would suggest you either leave your money where it is, and re-evaluate your allocation within the annuity, or you reduce the amount of income to a level that a CD ladder can produce over time. If you're taking a distribution from an investment account without a living benefit, I would suggest a distribution rate that does not exceed 4% per year.
The income you receive from your account, will give an indication of how much risk you may need to take with your retirement account. For my illustration, I will assume you have roughly ½ your retirement assets allocated to bonds. If you are taking a 5% distribution annually, this allocation gives you approximately 10 years worth of income before any stock related assets would need to be sold. If history is any guide to the future, your stock investments should appreciate handsomely over the next 10 years. In my opinion, it is not a good time to be throwing in the towel on your retirement game plan. I would suggest you read this week's New York Times piece written by Warren Buffett. He does not frequently pen opinions on the stock market, but when he has, he has tended to be very prescient with his predictions over the long term.
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David Schauer, CFA, MSFA, CFP®
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Hanson McClain
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