Figuring out exactly how much money you need to save for your retirement is one of the toughest challenges that investors face. In that light, some recent government proposals to help investors figure out how much income their retirement portfolios will be able to pay them after they retire may give you some useful information. But by misleading retirement savers about what the most important aspect of their saving strategy actually is, it may do more harm than good.

Focusing on income
Recently, investors haven't been too happy about employer sponsored retirement plans, such as 401(k) accounts. A combination of hidden fees, lousy investment choices, and bad returns have thrown retirement savers for a loop. It has taken the huge rally we've seen over the past year to help some workers recover.

In an attempt to respond to criticism, the federal government has been looking at ways to make it easier to use 401(k) accounts to plan for retirement. In particular, one proposal wants to make immediate annuities more available to workers, as well as giving investors more information about just how much income their current savings would yield them in monthly income if they converted their investments to an immediate annuity.

There are some compelling reasons to try to reduce the complexity of saving for retirement to a hard-and-fast monthly income number. After all, if you have a traditional pension, the only thing you have to think about is how much you'll get every month. How your employer will invest to generate that monthly income is up to your employer, not you.

Moreover, after you retire, it becomes more important to make sure your investments will support you than to try to make them grow. Nevertheless, unless you have a huge nest egg, you'll probably need both income and growth from your portfolio in order to support yourself after you retire.

Weighing the risks
Annuities get a lot of criticism from financial planners that believe their features aren't worth enough to offset their higher fees. An immediate annuity, however, does something that other investments can't: it guarantees a lifetime stream of income that won't run out as long as you live.

As a way to handle longevity risk, therefore, immediate annuities do a great job. But there are other risks that annuities can't handle as well. They include:

  • Inflation risk. You can get annuity payments that will adjust upward each year. But that typically comes at the cost of a lower starting monthly payment -- and even if your payout is tied to a general inflation figure, your own personal expenses could rise at a faster rate.
  • Handling big expenses. Once you start taking monthly payments, you often no longer have access to the principal you invested in your immediate annuity. That's fine -- unless you have an unexpectedly large expense you need to pay. With an annuity, you may lose the flexibility to dip into your nest egg when necessary.
  • Seeking growth. An immediate annuity locks you into your current standard of living. If you want to improve your financial situation, however, you'll need riskier investments than an immediate annuity.

The right portfolio
Putting part of your money into an immediate annuity is a good way to hedge your longevity risk. But you should also have some other investments.

I think dividend-paying stocks are the most important component of a retiree's portfolio. The right stocks pay both a healthy current dividend as well as giving you the prospects of growing payouts down the road. Here's a good sample:


Current Yield

5-Year Dividend Growth Rate

McDonald's (NYSE: MCD)



Total SA (NYSE: TOT)



Colgate-Palmolive (NYSE: CL)



Intel (Nasdaq: INTC)



Eli Lilly (NYSE: LLY)



Source: Yahoo Finance,

Combined with a mix of bonds and short-term investments, stocks like these can help your portfolio generate solid, steadily growing income.

In addition, even retired investors can afford to invest a modest amount in growth stocks. Even though companies like Google (Nasdaq: GOOG) and Intuitive Surgical (Nasdaq: ISRG) don't pay dividends, their capital gains can supplement your wealth and help you continue to grow your nest egg even after you stop earnings money to add to it.

The complete picture
Thinking about income is an important part of your retirement plan. But it shouldn't be your only consideration. Although immediate annuities may seem like the safe choice, you'll likely do far better with a broader mix of investments in your retirement portfolio.

In the rush to pick great investments, many retirement savers skip one important issue. Read why Fool contributor John Rosevear thinks there's one question you can't afford to skip about your retirement.

Fool contributor Dan Caplinger would be happy to take his Social Security in a lump sum, given how little he's likely to get otherwise. He doesn't own shares of the companies mentioned in this article. Google and Intuitive Surgical are Motley Fool Rule Breakers selections. Total SA is a Motley Fool Income Investor choice. The Fool has created a covered strangle position on Intel, which is a Motley Fool Inside Value pick and on which Motley Fool Options has recommended buying calls.  Try any of our Foolish newsletters today, free for 30 days. The Fool's disclosure policy won't quit on you.