Help! I haven't saved enough to retire

Upon retirement in May, 2008, I will receive approximately $470,000. How can I invest this to receive monthly benefits of at least $2,500?
— Peggy G., Anchorage, Alaska

There are a number of ways to go: a lot depends on what other income and savings you’ve got. You also need to decide whether you want to live on just the investment return - or whether you’re comfortable spending the principal gradually over time.

Let’s say you put the money in a good old US Treasury bonds. At the moment, the 10-year Treasury is yielding about 5.25 percent. So if you invested $470,000, you can expect roughly $24,675 a year in interest payments (not compounded), or about $2,056 a month - a bit short of your income target. On the other hand, if you tapped the principal, over the course of 20 years you could boost your income to $2,405.25 – close to your target. The risk is that you outlive your savings: at the end of 20 years you’ll have nothing left in this account.

If you want to live off income only, you’ll need to find a way to generate a higher return than Treasuries; that means taking on more risk. To generate $2,500 a month, you’ll need to find an investment that returns roughly 6.4 percent. You could probably get that from a mutual fund that invests in bonds, but there’s the risk that if interest rates rise, the value of your fund shares could go down. You could try for even higher returns with a stock mutual fund, but you will almost certainly have uneven returns — and could lose a big chunk of your savings in a down year.

Another option that’s out there is an annuity, which is more like an insurance policy. There are lots of different flavors, depending on what kind of coverage you need. (Do you want to include benefits for a spouse that survives you? Do you want your income to vary and take advantage of market gains — or guarantee a fixed payment that shields you from market downturns? Do you want to lock in an income for life — or guarantee only for a set number of years?)

The problem with annuities is that they can be very complicated — and it’s harder to figure out just how much you’re paying in fees. If you chose the security of a fixed payment for life, you’re also betting the issuer of the annuity that you’ll live longer than they think you will. And usually, buying an annuity means you leave nothing to your heirs when you die.

Keep in mind that if you set this up to pay fixed monthly payment for life, your spending power will gradually decline as inflation eats away at your $2,500. So you’ll probably want to set this up to provide you with a gradual increase in payments to help keep up with inflation.

You also need to consider what your taxes will look like. If you decide to buy bonds, for example, you can save a bundle on taxes with municipal bonds.

And your retirement plan should also include some estate planning. Some people, for example, who have already decided to leave money to charity in their will find they're good candidates for something called a Charitable Remainder Trust. Basically, you give money to the charity of your choice now, and that charity sets up a trust that pays you a fixed amount monthly as long as you live. You can also get a tax deduction for part of the gift while you’re still alive. That can be useful if you have a big capital gain to offset — like the sale of a house.

But which option is “best?" It’s hard to come up with a single “right” answer — a lot depends on how this piece of cash fits with other sources of income, assets, taxes, etc. For that, you really need to sit down with a good financial planner. A few hundred bucks for their fee could more than pay for itself in money you save down the road.

MORE FROM ANSWER DESK View the archive Check out answers to earlier reader questions. Or click on a topic below for more specific questions and answers: Accounting 101 Credit and debt Economic explanations Energy enigmas Home sweet home Miscellaneous mysteries On the job Saving and investing Small business Taxes

MORE FROM CRACKED NEST EGG

Cracked Nest Egg Section Front

Amid panic, uncertainty, they retired anyway Out of work, out of options, into retirement Education a factor in outlook on retirement The new ‘retirement’ plan: Keep working With effort you can still retire well Blacks, Hispanics save less for retirement Jackson death illustrates will vs. trust issue Real-life dead pool the next subprime mess? Employers cutting back on 401(k) plans Couples don’t talk about their financial future Cracked Nest Egg Section Front   Add Cracked Nest Egg headlines to your news reader: