Timur and Marguerite recently met with the benefits administrator at Timur's employer to establish his retirement date and to discuss payout options for his pension. Timur just turned 67, while Marguerite, a self-employed artist, will be 62 in 6 months. The benefits administrator was helpful in outlining potential sources of income that they can expect in retirement. Annual estimates are as follows:

Social Security $11,500 Defined-benefit plan $16,000 (single life annuity) Marguerite's work $6,000 Defined-contribution plan $10,800 (single life annuity) Other $4,500 The defined-contribution payout was calculated based on a 401(k) balance of $270,000 earning approximately 8.0 percent.

The benefits administrator indicated that a 100 percent joint and survivor annuity would decrease yearly benefits by about $3,000 in the defined-benefit plan and $1,500 in the defined-contribution plan.

Questions 1. What are the advantages associated with taking the pension payouts in the form of an annuity? What are the disadvantages?

2. Based on the information provided, which type of annuity would you recommend that Timur and Marguerite choose, given the difference in their ages and earnings?

3. Would you advise them to take the annuity offered in the defined-contribution plan, which guarantees a 4.0 percent rate of return, or would you recommend the lump-sum payment? Why? What are the disadvantages associated with your recommendation?

4. What recommendations would you make to Timur and Marguerite to help them monitor expenses and safeguard their retirement lifestyle?

5. Timur is anxious to replace work with babysitting his new grandson. He and Marguerite want to establish a 529 account this year. If all of the relatives together can contribute an average of $6,500 per year for the next 18 years and the 529 account earns 7.7 percent, how much will be available for Timur's grandson's college expenses in 18 years?

1. What are the advantages associated with taking the pension payouts in the form of an annuity? What are the disadvantages? A lump-sum payment would be appropriate in this case. The annuities guarantee an approximate rate of return equal to 4.0 percent, which is half of their projected rate of return. Timur and Maurguerite could be better off taking a lump-sum distribution and purchasing an insurance company annuity on their own, or investing the proceeds themselves. Given historical rates of return, they could expect to earn substantially more than 4.0 percent, even in a conservatively managed mutual fund. Possible disadvantages include choosing an annuity from a poorly rated insurance company that could jeopardize the safety of the distribution. If they invest the distribution themselves in stocks, bonds, or mutual funds, they run the risk of making a bad investment and losing the money they've saved. However, these disadvantages may be offset by the flexibility that a lump-sum distribution offers. Are the above statements true or false?

2. Based on the information provided, which type of annuity would you recommend that Timur and Marguerite choose given the difference in their ages and earnings? A 100 percent (?) would be the most appropriate in their case. Their pension income accounts for 55 percent of their total income. If Timur were to pre-decease Marguerite, she would need the greatest possible income in order to maintain her level of living.

3. Would you advise them to take the annuity offered in the defined-contribution plan, which guarantees a 4.0 percent rate of return, or would you recommend the lump-sum payment? Why? What are the disadvantages associated with your recommendation?(Select all the choices that apply.)

A. Disadvanages to a lump-sum payout include: possibly running out of money, not having the discipline to keep from spending the money, and it complicates the financial planning process because you are responsible for your own retirement funding.

B. Disadvanages to a lump-sum payout include: running out of time to spend the money, having the discipline to keep from spending the money, and it complicates the financial planning process because you are responsible for your own retirement funding.

C. In this way, they would avoid paying taxes on the distribution while the funds continue to grow on a tax-deferred basis.

D. The other way, should Timur desire to continue working, is to have him transfer his 401(k) balance to a qualified plan with his new employer.

E. Disadvanages to a lump-sum payout include: running out of time to spend the money, not having the discipline to keep from spending the money, and it complicates the financial planning process because you are responsible for your own retirement funding.

F. One way to reduce the impact of taxes on a lump-sum distribution is to have the distribution "rolled over" into a Roth IRA. G. One way to reduce the impact of taxes on a lump-sum distribution is to have the distribution "rolled over" into an IRA.

4. What recommendations would you make to Timur and Marguerite to help them monitor expenses and safeguard their retirement lifestyle? Timur and Marguerite should consider the following strategies to help them monitor expenses and safeguard their retirement lifestyle:(Select all the choices that apply.)

A. Adjust their investments, particularly in the 401(k) plan, to cover inflation and allow their money to grow conservatively. Fixed income investments, like CDs and bonds, may be safe, but with a long time horizon during retirement, they must still beat inflation and have moderate growth to insure adequate funds for the future.

B. Monitor their investments and the overall health of their former employer. Insurance or other benefits, as well as the price of any company stock they own, could be affected by changes in the company. Changes in company benefits or their investment values could impact their retirement goals and require them to make adjustments.

C. Use computer programs or Internet sites to spot the best investment opportunities and try to invest in them as soon as possible.

D. Keep their insurance coverage up to date and the premiums paid. Don't risk an uninsured loss.

5. If all of the relatives together can contribute an average of $6,500 per year for the next 18 years and the 529 account earns 7.7 percent, the amount available for Timur's grandson's college expenses in 18 years is $