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 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 7.5 percent, how much will be available for Timur's grandson's college expenses in 18 years?
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 ………………………………….. $12,000
Defined-benefit plan …………………………… $18,000 (single life annuity)
Marguerite's work ……………………………… $7,000
Defined-contribution plan ……………………... $10,000 (single life annuity)
Other ………………………………………….. $4,000
The defined-contribution payout was calculated based on a 401 (k) balance of $250,000 earning approximately 8 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.