Gridley Associates Inc

SPRING 2011

Running Out of Money?

We all have two basic wishes for our retirement, sufficient money to live on and the health to enjoy it.  Ironically, good health could be the very reason you don’t have enough money in retirement.  Thanks to advances in medicine we’ve seen life expectancies increase dramatically in the past few decades and there is every indication that longevity will continue to increase.  Remember that life expectancy statistics are just averages so those with good family health histories, healthy lifestyles and good health care will likely exceed the averages and live well into their 90s or even beyond. Unfortunately, as people live to a very old age, their expenses for medical care and support tend to increase which can put a real strain on their finances.  While it’s nice to live a long life, living to a ripe old age can raise a serious risks of running out of money late in life.  The obvious question is how do you balance your retirement planning for a long life expectancy with the desire to enjoy your hard earned savings while you still can.  Spend too much and you’ll risk running out of money.  Be too conservative and you might miss a more comfortable, satisfying retirement.  Fortunately longevity insurance may help provide a solution.

Longevity insurance, or more accurately a Deferred Income Annuity (DIA), can help guarantee you’ll never run out of money no matter how long you live.  It’s a pretty simple form of insurance, you pay a lump sum of money to an insurance company when you retire and they will pay you annual income starting at some future date for the rest of your life, no matter how long you live.  The key here is that you need to live long enough to collect the future payments; if you don’t, you get nothing.  While this may seem like a bad deal, in fact those who die without collecting will help increase the returns for those who do collect.   If you die early, you obviously won’t need the income but if you live long enough you’ll get a much greater payout than if you’d just invested the up front sum on your own, and your payments are guaranteed to continue as long as you live.  For couples, both the husband and wife can get policies so they’re covered even after their spouse dies.

The “subsidy” from those who die early is largely what makes this so economically attractive.  The bigger the window between up front payment and the time you collect the better the payout, so it pays to consider this strategy this early.  Based on recent quotes* if a 65 year old male buys $50,000 worth of longevity insurance he’ll collect close to $2,000/month for the rest of his life starting at age 85.  If he makes that same $50,000 up front payment 5 years earlier at age 60, at 85 he’ll receive about $2,750/month for life.  Make that payment at age 55 and he’ll get $3,800/month from 85 on.  Locking in a guaranteed cash income in your later years allows you to effectively set more liberal spending plan for the earlier portion of your retirement and removes a great deal of the fear of running out of money.  In addition, you can select different payout start dates so by staggering the ages when you start to collect, you can provide a measure of inflation protection by increasing your income as you get older.  Naturally there are some risks; you need to live long enough to collect and you need to choose a financially sound insurance company that will be around longer than you will.  The trade off is that that the insurance company takes all the market risks and you get paid a fixed amount regardless of their investment returns.

A carefully crafted plan utilizing longevity insurance can produce a steady income late in life without concerns of market risk or simply outliving all your savings.  As life expectancies continue to increase, this is a strategy well worth considering.

 

Randy Gridley

* Source:  Met Life, rates subject to change at any time