Should I move now whatever money I can to federally insured savings accounts?

BY busadmin  October 3, 2008 at 2:45 PM EST

Wall Street; AP photo

Question/Comment: I am 62, hoping to retire at 67. I have no debt and my money is invested (following the advice of a pricey financial adviser) in both equities and guaranteed income. I’ve lost a big chunk of dough in the last year. Should I move now whatever money I can to federally insured savings accounts? Won’t I be locking in my losses? Help!

Paul Solman: The first question would be: What % in equities? The second question: What do you mean by “guaranteed”? By whom? For what sort of investments? Until those facts are known, no one can even begin to advise you.

That said, I’m tempted to embark on one of my long-winded responses – in this instance, on some of the verities of investing. We’ll see how long I (and you) last.

The first considerations, when investing for retirement: How much will you need? Starting when? For how long?

Okay, in this case, five years is the hoped-for starting date; we don’t know how much you figure to get by on thereafter; only the lord knows how long you’ll live (and S/He’s not telling).

So let’s make up a lucky number for your standard of living: $77,777 a year, before taxes. (WARNING: For it to be a CONSTANT standard of living, the lucky number has to rise with inflation.) Furthermore, let’s say you don’t want to run out of money at your “due date,” which at 62, assuming no life-shortening illnesses, was 84, last I looked (this afternoon).

For our own retirement planning, my wife and I use the age of 100, figuring the cushion – should there be one – would go to the kids. Frankly, we’ve wondered if we shouldn’t extend that number to 110, having read Ray Kurzweil on life extension and supposing that there is some reasonable chance medical science is on the cusp of longevity breakthroughs.

Okay, how much income are we expecting after age 67 even if you don’t work? Let’s stipulate social security at $20,000 a year, because it’s an easy number. Wait until age 70, and it would be more, but let’s use $20k, which WILL BE inflation-adjusted, if things remain as they are. That means your investments have to generate about $58,000 a year, inflation-adjusted.

So now comes the big question: How much do you need to generate $58k, inflation-adjusted and guaranteed until age 100? One answer may seem as extravagant as it is simple: about a million dollars.

This is the answer if you price an inflation-adjusted annuity from Vanguard. You can go to this website for the actual quote. The million-dollar figure comes from plugging in your specs, though I couldn’t get the quote for 5 years from now. This is roughly the number if you were to start taking payments next year. In other words, at age 63. And last until you die.

This is presumably based on your actual life expectancy of 84, so if you live the extra 16 years, you make out like a bandit. (An old bandit.) Live to less than 84, and the annuitizer gets to use the extra money for those who outlive actuarial expectations.

And this number — $1 million invested in order to get an inflation-adjusted $56,600 a year (as of today) is a pretty good guess as to how much you’d need to guarantee YOURSELF that income stream to some age like 84 if you bought Treasury-Inflation Protected Securities on your own. There may be a calculator on the web somewhere that can do those numbers for you.

There is SOME risk: the annuitizer could go under. Presumably, your annuity would still be safe. But these days, there seem to be no sure bets. So maybe buying 10 $100,000 inflation-protected annuities would make more sense. Or just buying the TIPS yourself with different-length maturities.

But enough. I’ll write more about TIPS some other time. Meanwhile, you might research them on the Internet.