Q-and-A With Jonathan D. Pond: Annuities and Retirement Saving

The decision involves which survivor option to take on your distributions. These typically include a range of choices, for example:

100 percent of the original benefit to the survivor for life

Two-thirds of the original benefit to the survivor for life

Half to the survivor for life

All to the annuitant for life, with nothing to the survivor

Payments over a specified period of time, rather than for life

Consider these questions:

 1. Have you prepared budgets that reflect how the death of either of you would affect the survivor, financially speaking? The net effect of the loss of other income (for instance, Social Security) and the reduction in living expenses will help determine the amount of the annuity’s survivor benefit. Many couples find that a two-thirds benefit to the survivor fits the situation. But everyone’s financial situation is unique, so it’s important to do the number-crunching.    

 2. Have you factored your respective health histories into the distribution decision? While estimating life expectancy is fraught with hazard, the annuity distribution decision might change if there is a likelihood that the annuitant and/or the spouse will not reach a “normal” life expectancy. For example, if the annuitant is in poor health, a 100 percent benefit to survivor might be appropriate. On the other hand, if the spouse has a life-shortening health condition, a zero or low survivor benefit might be considered.

 3.  Have you compared the income you will receive under the various distribution options? It wouldn’t hurt to ask for distribution amounts under all available distribution alternatives. You may find that you’re not giving up much income to provide a greater benefit to a surviving spouse or partner. If that’s the case, you may want to opt for a more generous survivor benefit.    

My employer informed us that the company is temporarily suspending the company matching funds for our 401(k) plan. They said they will start it back up in the future, but probably not this year. Because they aren’t matching funds, is it better to stop contributing to the 401(k) and contribute to a Roth IRA instead? Or should I still contribute? -Michael, Ohio

This question leaves me conflicted. Contributing to a Roth IRA is more financially advantageous than contributing to an unmatched 401(k) plan. But the advantages come later on, when you can enjoy tax-free withdrawals from your Roth IRA account. You have to be prepared to give up the tax breaks of contributing to a 401(k) plan.

Simply put, if you contribute to a Roth IRA in lieu of a 401(k)—matched or unmatched—your taxes this year will be higher. But over the long run, even factoring in the higher current-year taxes, the Roth IRA beats an unmatched 401(k). 

My concern is that opting for a Roth IRA may cause you to give up on your 401(k) plan, even after your employer restores the match. As the economy rebounds and you become more confident about your financial future, I hope that you can get into a position of funding both your plan at work and a Roth IRA.

The stock market crisis has caused retirement savers to lose site of the surest way to build up the resources you’ll need for a financially comfortable retirement: saving regularly and regularly increasing the amount you save, no matter how badly the investment markets are faring. Ideally, this would involve contributing to more than one plan.

My financial adviser/broker recently changed employers. I now face the decision of staying with this individual and his new company or choosing a new company. How do I identify sound financial companies in light of the recent disasters of fraud, bad loans, buyouts etc.? –Robert, Iowa

This is a decision that many investors must face, given all the turmoil in the brokerage community. Here are some matters to consider: