We insure just about everything don’t we, our homes, cars; we even use trip insurance to protect our vacations. So why not guarantee our retirement plan? It is much easier than you think (and much less expensive than you think).
Let’s start with our favorite product, annuities. Why annuities? Simple, the risk is outsourced to a third party, the insurance company. If we live too long, tough luck for them, they keep paying. If we die too soon, tough luck for them, our heirs get the unused balance. Most folks forget about the critical part of retirement planning, living too long, dealing with mortality risks. No one knows how long they will live; it is only a guess, a real crap shoot. Relying on guessing is not a good idea, why? Because a considerable part of the time we are wrong because it is just that, a guess.
By using an annuity, the problem isn’t yours anymore; it belongs to the professionals who run the company. They have plenty of reserves, and if they are just a little wrong, actuarially, they have it covered. Covered by the reserves demanded by regulators to make sure they are right. Whatever period you chose, they have you covered. So what is in it for the insurance company? Remember, they think only one way, long-term. If they get to hold your money for a long time, they are happy.
So on top of all the guarantees associated with annuities, why even bother with insuring the risk? Simple, future options are more under your control, control that can become very important to your future and your family’s future. Here is the first question to ask yourself, who is issuing the annuity to you? Yes, very good, it is a life insurance company. The life insurance company also sells another product, life insurance. You can use their policy to insure your retirement risk, to further protect your future options.
Instead of thinking of lifetime income think of it as two lifetimes, one which lasts ten years and one which continues until your last breath. Doing so makes everything so simple, so stress-free.
As an example, let’s assume I have $300,000 set aside for retirement and let’s say I am now 65. If I buy a lifetime income annuity now, I will receive about $16,000 a year for my lifetime. But, if I buy a ten-year payout for the $16,000 I would only need to spend about ½ of my money ($150,000). I could then send the other $150,000 ahead for ten years.
Based on a guaranteed return of 6% (yes that is accurate) I would then have $268.627 in my account, a fully guaranteed amount. Now fast forward ten years, and I am no longer 65, I am 75. Now my life expectancy is much shorter and if I used the funds to replace the ten-year income I initially selected, my income would not be $16,000 a year but would now be $24,500 a year (income rider).
I have given myself a huge raise, which I will need since inflation would have reduced my purchasing power in 10 years.
But what about insuring the risk, what happens if I were to die, what would my spouse receive? First of all, she would get the balance owed on the original ten year period (the $16,000 a year) plus she would inherit the funds in the money I sent ahead (the original $150,000). She could then assess the account at any time she wished without any fees, charges or expenses. She could wait until the end of the ten year period and give herself a raise; her options are fully and completely open to her.
Or, I could also do this, I could buy a ten-year term life insurance policy made payable to her. I could remix my money and take a little more now and send just a little less ahead. I would use the extra money to buy a life policy (not whole life but term). To insure me at 65 for $150,000 worth of insurance benefit (I am in average health) is about $150 a month in premiums (varies between companies and health issues). If I die, my wife gets all the money in the annuities plus the life policy which is paid tax-free. I give up a small amount of funds available to me in 10 years and instead use the money to buy the “risk.”
If I don’t die (yeah) I would still have enough money in the annuity I sent ahead, and life would roll continue.
Sound too good to be true? In fact, it is true, and these tools and the benefits they provide can be available to you. There are lots of ways to look at retirement planning, for me the lack of risk is the only thing I have any interest in, NO RISK.
Take a look at this simple and yet proven method of managing your essential retirement dollars.