Life insurance can be used for many purposes –wage replacement, your mortgage, children’s college educations, and estate planning. 

To briefly review, group insurance is typically provided by your employer.  It could be a multiple of your salary – whatever multiple your employer deems appropriate.  If you purchase additional insurance on your own in the form of whole life, you keep making premium payments and have coverage for life (usually defined as age 95).  The proceeds, upon your death, pass to your beneficiary and can be used for any purpose.  Term insurance is generally less expensive than whole life and provides coverage over a certain time period.   In the event of your death, a death benefit is paid, but once the contract period expires, the policy must be renewed (if still needed), usually with a new, higher premium.

If You Lose Your Job, You May Lose Valuable Insurance Benefits

Some employees, most notably, senior executives, are given group insurance as part of their overall benefits package.   For example, you may have a total of $3.5 million in insurance coverage, with $2 million of that total coming through your employer and the remaining $1.5 through an external policy that you have purchased.  If you lose your job, however, you may also lose that group insurance policy.  In order to ensure adequate, ongoing coverage, be sure to check with your Human Resources representative to see if your firm offers either portability of that coverage, or some kind of opportunity, similar to COBRA, to finance your policy once your tenure is over.  If not, you may have to bridge the gap with term insurance.  Consider purchasing a short-term policy, say 10 years, to provide coverage while you are looking for another position.  Once you obtain another job, depending on your employer’s insurance benefit, you can cancel the policy.     

During the course of performing a cash flow analysis for you, your financial advisor can help you determine what amount of life insurance is right for you and whether your current policies fit the bill.  He or she can help you decide on the coverage you need to ensure your family’s future financial security.     

During the height of the recession, we saw many people putting up to a year’s worth of living expenses in their cash savings accounts.  In speaking with clients during this time, we found that people were comfortable with this level of security as it was taking longer to find jobs and the market was especially volatile.  But lately, we’ve seen consumers putting their cash back to work and keeping lower levels of cash on hand.  This is most likely due to several factors, including general fears of another 2008 subsiding; small, positive signs in the U.S. economy; and as always, the need to stay ahead of inflation. 

Of course, this more optimistic attitude about the state of the markets and the economy varies from person to person.  Nevertheless, as fears of prolonged recession generally seem to be receding, it’s not a bad idea to revisit some budgeting and investment basics: 

• “Pay Yourself First” – Taking a percentage of your net pay every paycheck to put into a savings account works better than itemizing all of your bills and expenses first and then determining what you can salt away.  Many people don’t do this.  It’s easier and, no matter what the percentage, you are bound to save more this way. 
• Fight inflation by investing your cash.  Investing is one of the safest ways to fight inflation, which is a much more serious threat to a person’s financial future than short-term market volatility.  This is critical in terms of consumers maintaining their current lifestyle and extending it into retirement.  Inflation is constantly at our heels.  Assuming an annual inflation rate of 3%, holding $500,000 in cash just over one year will cost you $15,000. 
• Pay down debt with the highest interest rates first, like credit cards (even before you pay yourself first).   This old adage still rings true — it doesn’t make sense to hang on to debt with double-digit rates if you are going to earn much less than that on any investment that you make. 
• In a worst-case scenario, considering borrowing against the equity in your home to fund emergency payments or to pay down a high credit card balance.  Mortgage and home equity rates are still at historic lows, so this type of debt should remain at the lower end of your payoff priority list. 
• Take advantage of employer -sponsored savings accounts. Most of you already know about the benefits of a 401(k) plan, but some employers offer additional tax deferred savings plans like Health savings accounts (HSAs) and flexible savings accounts (FSAs). These accounts allow you to save by using pre-tax dollars to pay for uncovered health expenses including deductibles.  Just make sure you perform a healthy calculation of expected expenses prior to committing dollars because you still want to be able to meet your immediate living expenses, and not forfeit the unused balance in an FSA. (HSA balances however roll over —it’s your account!  Click here for more information about HSAs.) 

Time will tell if the U.S. economy and markets will continue to stabilize and move in a positive direction.  In the meantime, your financial advisor can help you create a personalized financial and investing plan geared to your overall objectives and risk tolerance.

You may have been given the opportunity to establish and contribute to an HSA each year when you enroll for your medical, dental, and other employer benefit programs.  HSA plans are only available to individuals covered by high-deductible health insurance plans.  Although HSA plans are required to have a $1,200 individual deductible ($2,400 for families) and can increase from these required minimums, many HSA plans offer 100% coverage and often don’t require co-insurance payments.  So, if you fall within this category and have out-of-pocket medical expenses greater than your deductible, your costs will actually be less than if you had a more conventional 80/20 co-share plan.  Unlike Flexible Spending Accounts, HSAs are not a “use-it-or-lose-it” plan.  You don’t have to use the money by a certain deadline.  In addition, the funds accumulated in your HSA can be used for more than medical expenses. 

Like an IRA, contributions can be made up until April 15 following the year for which they are made.  For 2012, annual contribution limits to an HSA are as follows: 

• $3.100 – Individual
• $6.250 – Family
• $1,000 – Annual Catch-Up Contribution for those Age 55 and Older 

Your annual contributions may be invested and there are a variety of options available in which to invest them.  As with any investment, you will want to inquire as to the annual fees associated with your investment selections and determine how these fees will affect your overall investment return. 

If you incur unreimbursed medical expenses during the year, you may deduct these medical expenses on your tax return.  However, in order to do so, your unreimbursed medical expenses must exceed 7.5% of your adjusted gross income.  For many of us, these unreimbursed medical expenses must be quite sizable before we will be able to see any income-tax benefit.  Your HSA contributions are deductible irrespective of the amount of your unreimbursed medical bills.  Additionally, the amount of your annual salary is not a factor — there is no income limit phase-out for the deduction.  It’s important to note, however, that reimbursed expenses from an HSA cannot be deducted on Schedule A of your Form 1040. 

If you choose to open an HSA, it is important for you to maintain accurate records and receipts for out-of-pocket medical expenses.   This is especially important in retirement.  As I mentioned earlier, with HSAs there is no requirement that reimbursements be made in a “timely” manner, so it is possible to accumulate years of out-of-pocket medical expenses and request reimbursement of these expenses after you retire.    If you have not been using your HSA account to reimburse yourself for out-of-pocket medical expenses throughout the years, your HSA investment account may have increased significantly and you may consider using the HSA as a dedicated set-aside for health care expenses.  You could, for example, use the money to pay for long-term care insurance premiums. 

Once you reach age 65 and are enrolled in Medicare, however, you may no longer make contributions to your HSA and withdrawals may be made for any purpose.  Withdrawals made to cover medical costs not covered by Medicare will be tax-free.  However, withdrawals made for purposes other than medical expenses will be taxed as ordinary income in the year of withdrawal. 

Upon your death, your HSA investment account is passed via beneficiary designation.  If the beneficiary of your HSA is your spouse, the account is treated as if it is your spouse’s HSA.  If the beneficiary of your HSA is someone other than your spouse, the HSA is not treated as an HSA account and the fair market value becomes taxable to the beneficiary in the year of your death.

If you are considering opening and contributing to an HSA, seek the advice of a financial advisor to determine how best to use the funds in the account over the years, and to discuss and select your investment options and the amount of your deductible.

One school of thought rejects the notion of a fixed withdrawal percentage throughout retirement.  Typically, the formula for withdrawing a set amount of your assets each year is based on a fixed set of assumptions, e.g., how long your retirement will last, good health, an investment return of ___%, for example.  These straight line calculations are not always realistic and don’t account for all of the variables that can and will affect your finances in retirement.  Life is not static — each year’s expenses and priorities won’t be the same. 

Consider this approach — schedule a meeting with your financial advisor to develop a cash flow projection for your retirement years.  The purpose of this is to assess what you anticipate your retirement lifestyle to be and whether these plans
match up well with your projected assets. Overall, there are many factors to bake into the plan.

Some financial advisors can run Monte Carlo simulations within your cash flow projections to help estimate the probability of financial well-being based on a set of variables that could include tax rates, market fluctuations, investment management fees, your asset allocation ( including your risk tolerance), an average investment return spanning several years, travel costs, projected life span, health care bills, etc., and your pension (if applicable). 

Running Out of Money is Not an Option

This cash flow analysis can help you determine whether you will outlive your assets—which is great news in terms of your longevity, but kryptonite as far as retirement planning goes.  Withdrawing too much too early in your retirement could ultimately leave you with a goose egg rather than a nest egg.

Realistically assessing how much you are spending now and plan to spend in retirement is key to a successful plan.  It’s also a good idea to review your plan a year or two after retirement and readdress each internal and external category.
You should plan on updating your plan at least every two years while in retirement.  As a general rule, try to save as much as you can while you are working. Remember that if you spend $200k/year but only save $17,000 per year maxing out your 401(k) that you are relying on one heck of a return on that $17,000 to allow you to continue to spend $200k in retirement.  Also, age 60 is not a good time for you to start talking to your financial advisor about retirement
planning.  Working together, it’s never too early to devise a cash flow – and a savings withdrawal plan— that makes sense.

While it’s beneficial to have a benchmark with which to start planning, the reality is that any fixed annual withdrawal is going to be different for each person, depending on their particular situation.  Your financial advisor can outline your
options, perform an analysis, and determine what course of action is likely to be best for you.      

Here’s how it works:  There are three main credit reporting firms in the U.S. — Experian, Equifax, and TransUnion.  These firms sell the information in your report to lenders, insurers, employers, and other organizations that have a vested interest in your prompt repayment. These entities use the credit information to evaluate your applications for loans, credit cards, insurance, employment, or a lease. According to the Federal Trade Commission, credit reporting companies collect and sell four basic types of information:

• Identification and employment information:  Your name, birth date, Social Security number, employer, and spouse’s name.  The company may also provide information about your employment history, home
  ownership, income, and previous addresses.
  Payment history: Your accounts with different creditors are listed, showing how much credit has been extended and whether you’ve paid on time.  Related events, such as the referral of an overdue account to a collection agency may
  also be noted.
  Inquiries: Credit reporting companies must maintain a record of all creditors who have asked for your credit history within the past year, and a record of individuals or businesses that have asked for your credit history for employment purposes for the past two years.
• Public record information: Information pertaining to bankruptcies, foreclosures, or tax liens, may appear in your report.  

How Your Credit Score Fits In

Your credit score represents your ability to repay your debt in a timely manner, based on the information contained in your credit report.  Lenders use a number of facts to make credit decisions, including your credit score. The numerical score most often used is provided by the Fair Isaac Corporation, otherwise known as FICO®.  It is based on a complex mathematical formula and can range anywhere from 300 to 850.  In general, a FICO® score above 650 indicates that you have a very good credit history and demonstrates that you are less of a credit risk. 

FICO® score calculations use the information individually from the reporting agencies and reflect your payment history, how much of your available credit limit are you using, new debt you may have assumed, and how long you have been borrowing.  Therefore, if one agency has different information from another agency, the FICO® scores may differ.

Obtaining Your Free Report

You may have heard advertisements on the radio or on TV that promise free credit reports.  Typically, if you respond to one of the advertisements, you can obtain a free report only if you make a purchase – for example, some offer debt counseling or require you to sign up for an  identity protection service.  Your best bet is to steer clear of these ads, many of which can be misleading, and instead request a free report as outlined below. 

You can obtain a truly free credit report from each of the three nationwide credit reporting companies once every 12 months.  You have the option to request all three reports at once or to order one report at a time. By requesting the reports separately, you can monitor your credit more frequently throughout the year.

The three companies use one website to process requests:  www.annualcreditreport.com.  You can also request a free report by phone at 1-877-322-8228 or by mail by completing the “Annual Credit Report Request” form on the site,  https://www.annualcreditreport.com/cra/requestformfinal.pdf) and mail it to Annual Credit Report Request Service, P.O. Box 105281, Atlanta, GA 30348-5281.  In addition, some states offer consumers free credit reports under state law.  These include Georgia, Maine, Maryland, Massachusetts, New Jersey and Vermont.

Once you receive your report, review it to ensure that the information is up-to-date, and most importantly, is accurate.  If you see credit card accounts or loans or other credit instruments/debt that don’t look familiar, contact the credit  reporting agency—as well as the lending institution or credit card provider—immediately.

If you believe you’ve been the victim of identity theft, contact your local police or you can file a complaint with the Federal Trade Commission (FTC).  The FTC outlines the steps you should take to rectify the situation. 

Maintaining good credit and having a good credit report can help pave the way for you to achieve your financial and lifetime goals.  An excellent source of information is the Federal Trade Commission’s publication, Building a Better Credit Report.  In addition, your financial advisor can provide guidance on matters of credit and debt repayment or consolidation.

Whatever your reasons, it’s important to “interview” several different advisors in order to select the one that’s right for you, preferably face-to-face, rather than over the phone.  If it makes you feel more comfortable, bring a good friend or relative with you who can help you screen the candidates. Often, it will come down to personal chemistry and gut instinct.  But there are certain characteristics that you should look for before making your decision.  For example, it’s important at the outset of your search to understand how a particular advisor makes their money.  This way, you can determine objectivity and motivation in suggesting a particular course of action or investment.   Financial advisors generally fall into the
following categories:

Fee-Only

Fee-only advisors receive compensation only from their clients and do not receive money from third parties, including commissions, rebates, bonuses, or finder’s fees.  The fees you pay could be in the form of hourly fees, a set fee for a articular
service, or a percentage of assets under management.  Advisors who are members of the National Association of Personal Financial Planners are strictly fee-only.

Commission

Advisors that are paid by commission make a living by receiving compensation from providers of investment and/or insurance products on the sales of those products.

Fee-Based

Some financial advisors will charge a fee to analyze your financial situation and they will also receive money from the sales of certain investment and/or insurance products.  They are paid using fee-based, or fee-offset, commission, not to be confused with fee-only compensation.

Some advisors “do it all” (or claim to); others stick to a few basic services.  Some concentrate on the investment side and can buy and sell stocks, bonds, and mutual funds on your behalf.  Others focus solely on creating current and future financial plans or addressing a specific objective like retirement or funding a child’s education. Minimizing your income and estate taxes is another potential area of expertise.  Determine what you need and be sure that the candidate has experience providing it.

Many advisors have one or more acronyms after their name that indicates their particular specialty and the level of training they have received.  These may include the following:  CFP® (Certified Financial Planner^TM), CPA (Certified Public Accountant), CPA/PFS (Certified Public Accountant/Personal Financial Specialist), CFA® (Chartered Financial Analyst®), RIA (Registered Investment Advisor), and RR (Registered Representative).  Depending on the kinds of services you require, you may be interested in interviewing individuals who hold one or more of these designations.

Choosing a financial advisor is a decision with ramifications, so it’s important to take special care during the selection process.  Even if you are satisfied with your current advisor, it doesn’t hurt to get a second opinion from another professional.  Your future financial security — and that of your loved ones — could benefit significantly from it.

To read more go to Choosing An Advisor

Choosing the right funds for your 401(k) is not always the easiest thing to do and most people do not spend enough time understanding their plans in order to get the most out of them.  The truth is, spending a couple of hours each year will benefit you for the rest of your life. 

Researching mutual funds may seem like a daunting task, but these days there are plenty of websites out there to help you get through it.    Most of the websites are free and contain all the information you will need to make the correct choices.   Morningstar, Google Finance will assist you in researching the entire universe of mutual funds.  Also, BrightScope (www.brightscope.com) will give you an assessment of your company’s plan.  BrightScope ranks company’s 401(k) based on fund selection, costs and generosity of the company.   It also compares the plan to the company’s peer group (i.e., its competitors).   

What to look for?

• Prior  Performance
• Expense Ratio
• Fund Manager’s Experience 

The first thing most people will look at is the track record of the fund they are investing in.  This is a very important part of the selection process, but it is just one element of the overall decision that you will ultimately make.  Expense ratio and experience of the fund manager are equally important.  

Prior Performance

Look for funds that have track records of a minimum of three years. Typically, performance will be published in one- year, three- year, five-year and ten- year increments.   Compare the performance of these funds against the appropriate benchmarks, like the S&P 500 Index or Russell1000 Index, as well as against other funds offered in the plan.   

Expense Ratio 

Many people think that the best funds have the highest expense ratios, but that is not necessarily the case.  In many cases, you are paying for the name or advertising.   There are a number of very good funds with much lower expense ratios. If there are index funds offered as part of the plan’s investment options, (which usually have minimal expense ratios), this is probably your best bet. 

Fund Manager’s Experience 

On any of the aforementioned websites there will be a section with the fund manager’s experience and tenure in the industry.   It’s important to find a manager that has been around long enough to have invested in different market  environments and cycles.   Ideally, try and find a manager with a minimum of 10 years’ experience.     

If you are not comfortable with determining your asset allocation or rebalancing, Target Date Funds are a very good option.    Target Date Funds will have a title similar to “Retirement 2040.”  Target Date Funds will allocate the bond/equity mix according to your estimated year of retirement.  Instead of having to monitor your asset allocation percentages yourself (60/40 for example), Target Date Funds handle it for you.  Target Funds will also balance the funds according to your age.  As you near retirement, the funds will be invested more conservatively.  .There will be greater equity exposure/less bond exposure at younger ages and less equity exposure/greater bond exposure at older ages.     

If this approach better suits you, be sure to check with your Human Resources department to see that any additional fees layered on top of the actual investmentsare reasonable.  Some Target Date Funds can be expensive.     

In Summary 

• When selecting a mutual fund, pay close attention to performance, expense ratio, and the fund manager’s experience
• Index funds are a very good and inexpensive option
• Target Date Funds will take the work out of determining your asset allocation and rebalancing.  Just make sure there are no additional fees layered on top of the actual investments

Standard Medicare Part D prescription plans contain a gap in coverage, and if you fall into it, you will pay substantially more than just your co-pay. This gap, also known as the “donut hole” phase, begins when your “total retail cost” of prescriptions reaches $2,930 in 2012 (this amount adjusts each year). The total retail cost is the combined total of all of your co-pays (25% typical), deductibles ($320 typical), plus co-insurance (your share of the plan’s costs that you may be required to pay).   Note that the $2,930 does not include your Plan D premium payments and certain drugs that aren’t covered.  You don’t have to worry about tracking this information because your prescription plan does this for you and it is provided on the Explanation of Benefits notice.

If you surpass the $2,930 limit, you are then in the “donut hole” and are responsible for 50% of the cost for covered brand-name drugs and 86% of all generic drugs (this is set to improve each year until in the year 2020, when only 25% of the cost of generics — typical co-pay — is required to be paid).  Previously, individuals were responsible for 100% of the costs during the coverage gap. The discount program that is currently in place is a result of the Protection and Affordability Care Act of 2010 and the Health Care and Education Reconciliation Act of 2010, which will eliminate the donut hole by 2020.

Once you reach $2,930, expenses are tracked until you surpass $4,700 for 2012 and then you’re out of the “donut hole.”  This is when your Part D plan kicks back in under what’s called the “Catastrophic Coverage” phase.  The $4,700 includes the FULL retail costs of your drugs while in the “donut hole” (even though you pay a lower percentage), as well as the deductible and co-pays you paid before entering the “donut hole.”  It does not include what the plan contributed during the initial coverage period (before the “donut hole”).

Your costs during the final phase of coverage, the “catastrophic coverage” phase, is the higher of 5% of the medication’s retail cost or $2.60 per month for generic drugs and/or $6.50 per month for brand- name drugs.

Medicare Part D plans are offered through private carriers all with their own retail pricing agreements, and tier system (called their formulary) so it’s important to ensure that the drugs you need are reasonably covered before selecting a plan.   It’s possible for two different people taking the same drugs, but that have two different plans, to enter or leave the “donut hole” at different times.  As a result, their out-of-pocket costs could be quite different.

For more information on the “donut hole” and Medicare in general, see the publication “Medicare & You 2012” at http://www.medicare.gov/Publications/Pubs/pdf/10050.pdf 

If you have any questions, it’s best to call your prescription plan directly, your State’s Health Insurance Assistance Program (SHIP) or your financial advisor.  Here is a link to the state insurance websites –http://www.medicare.gov/Contacts/staticpages/sids.aspx.

Savings Bond Basics

First, let’s look at some of the basics of savings bonds. U.S. savings bonds are considered one of the safest investments because they are backed by the full faith and credit of the U.S. government. U.S. savings bonds provide tax advantages and there are several types, such as Series EE bonds and Series I bonds.  

Series EE bonds issued after 2005 earn a fixed rate of interest. Interest compounds semiannually for 30 years and if you buy them as paper bonds, they are guaranteed to reach face value in 20 years. Electronic Series EE bonds are issued at face value and the interest is credited electronically. 

Series I bonds are issued at face value and the interest is a combination of a fixed rate (set at time of issue) plus a variable semiannual inflation rate. These rates are combined to determine a composite earnings rate. 

Below is a brief Q&A: 

How much are my savings bonds worth?

So how can you figure out how much your bonds are worth? The easiest way is to use the online Savings Bond Calculator available at http://www.treasurydirect.gov/BC/SBCPrice. You will need to know the type of bond, the denomination, and issue date to use the calculator. Just enter each bond and voilà, the calculator creates an inventory of your bonds with a total value.   

Should I hold on to my savings bonds?

Now that you know how much your bonds are worth, are they worth keeping? You will need to determine how much the bonds are earning and how much you anticipate they will earn. The Savings Bond Calculator will show you how much interest your bonds are currently earning and what the current yield is. If the yield is good given where current interest rates are, then it may be worthwhile to hold the bonds. 

You also must evaluate the bonds in the context of your overall portfolio. You need to see how they fit into the overall rate of return you need to achieve on your portfolio to meet your lifetime cash flow needs, how much risk you can take, as well as your current asset allocation. 

How do I cash out my savings bonds?

Savings bonds are eligible for redemption one year from the issue date. However, both EE and I bonds have early redemption penalties if redeemed during the first five years. Once a bond is five years old, there is no interest penalty for redemption. 

You can redeem electronically purchased bonds at the Treasury Direct website. Your bank account will be credited with the redemption amount. You can also cash in your savings bonds at most local financial institutions. Additionally, you can mail the bonds to the government for redemption by completing Public Debt Form 1552 (http://www.treasurydirect.gov/forms/sav1522.pdf) . If you have a large number of bonds to redeem, the use of this form allows you to redeem the bonds without having to sign each bond. 

You may also have the option of reinvesting the proceeds into a new bond. 

Do I have to pay income taxes when I redeem a savings bond?

Savings bonds are not subject to state or local income taxes on the interest, but they are subject to federal income tax (except when used for education if you meet the requirements – see below). However, you can defer paying federal income taxes on the interest until the earlier of cashing in the bond or until it matures. You will need to factor in the federal tax consequences if you have a large build-up of interest that will be subject to tax at redemption. 

You can also choose to report the interest each year as it accrues. However, once you do this, you must continue to report interest earned annually for all savings bonds you own and any you may acquire. 

(Savings bonds are also subject to estate, inheritance, gift, or other excise taxes, whether federal or state.) 

How can I cash out my savings bonds tax free?

Qualified taxpayers can exclude all or a portion of interest earned on the redemption of eligible Series EE and Series I bonds issued after 1989. You must be at least 24 years old before the bond’s issue date, the savings bond proceeds must be used for qualified educational expenses, and there are also taxable income limitations. (When using bonds for your child’s education, the bonds must be registered in the parent’s name(s). Your child can be listed as a beneficiary, but not as a co-owner.) You can find out more about this exclusion in IRS Publication 970, Tax Benefits for Education, (http://www.irs.gov/pub/irs-pdf/p970.pdf). 

So maybe it’s time to take a look at your savings bonds and decide whether to keep or redeem them. Your financial advisor can help you with this decision.

For some people, the annuity makes sense because they need a steady stream of income.  They may be high spenders, and the annuity will force them to spend within their means.  Some retirees just want the peace of mind that their check will be in the mail each month no matter what is going on in the stock market.  Why is this important?  If you roll over your entire pension into an IRA, you are subjecting these funds to market volatility.  For wealthier retirees, this is probably fine.  They either do not mind some volatility, or have enough money to withstand the market gyrations.

The lump sum option has its advantages, too.  The main advantage is that you are in control of how the funds are invested.  The retiree can take these funds, invest them on their own (or with a financial advisor) and ultimately have them invested in a well-diversified portfolio.  With many years to invest these funds, the rollover can grow into a much larger pot of assets which can eventually be passed down to future generations.  With the annuity, it is customary that once the second spouse passes away (if they are the beneficiary), no more benefits will be paid.

When deciding on which option to choose, it is best to look at your overall financial plan.  A cash flow projection analysis is a good tool to use as it will help illustrate the pros and cons of each.  For example, if your cash flow model is taking into account a projected annual investment return with a corresponding standard deviation (which is a measure of market volatility), you should be able to gauge if market volatility is a factor for you.  You may get better results with the annuity because market volatility is then taken out of the equation.  The annuity, in a sense, can stabilize your cash flow because it is a steady, guaranteed stream of income.  At the same time, the annuity could work against you because annuity amounts usually do not change.  It is a fixed amount year after year.  The problem here is that inflation could start eating into the purchasing power of that annuity since your expenses will grow but the annuity will not.  The lump sum can usually take inflation out of the equation, but your level of spending, your total amount of assets, and market volatility may show you that the annuity is better.

Lump sum or annuity?  It is clear that which option to choose is not an easy one.  It takes some analysis and understanding of your overall financial situation — as well as some professional assistance from your advisor—to make a wise decision.