DO I HAVE ENOUGH?
PROLONGING YOUR MONEY OVER MORE YEARS
(Caveat: Do not try this at home! Don't do this without advice that makes sure it works for you! [Use a professional, but one who is a CFP and not one who is an insurance agent; the person must understand “the time value of money.”])
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BE FINANCIALLY ABLE TO LIVE A LONG TIME!
If you go into retirement and are planning on living until age 95, you may be amazed at the amount of money that seems to be needed.
However, a small, but significant, shift in thinking can make a huge difference.
We are worried about our money running out if we live too long. If that is the case, what we should do is take out “living insurance” that covers us for “living too long.” This is the reverse opposite of “life insurance”, which is about your death. This “insurance” covers you if you live too long [i.e. have too much life at the end of your money].
Basically, you have someone (insurance companies) bet that you are going to die earlier, on average, and if they are wrong and you live longer, they have to keep paying you all the years of your life.
There are two ways of doing this:
Annuities
Reverse mortgages
Both pay you as long as you live, so living longer is no problem. [However, mention to the financial advisor that you would like to hedge inflation, so that he/she can structure the right program for you. This means you can get higher payments every year that adjust for inflation.]
[In the case of the annuity, if you don't have cash, then you purchase, in essence, an annuity witht the equity in your house. The payments per month will be paid from the annuity cash flow, which will be higher than the mortgage payments.]
Let’s say, theoretically (so check out what the actual numbers are), you are age 75 and your computed life expectancy is age 84. You invest $200,000 into a fixed lifetime annuity. [In a fixed lifetime annuity, nothing is left for your estate. If you want one with your spouse included as an annuitant, then the amount of payment per year will drop a bit.]
The insurance company might figure they can make a net 4% on the money after expenses and then they may build in a few extra years of pretend life expectancy, so that they use their calculator and compute that they break even at age 86 and 4% paying you $22,830 per year. (Now, if you invested it at 5% and spent all the money, including the principal, over the next 11 years, you could spend $24,078 per year, but you would have run out of money at the end of the 11 years – and would be forced to die, so to speak.)
Those payments would continue as long as you live. If you lived to 95, you would have been able to spend (not adjusted for taxes) $456,000 versus $264,858 if you invested the regular way and used up all your money. However, if you lived 5 years, you’d spend, in total, $114,150, so you’d lose instead of win. This is why this could be called “reverse life insurance” since you’re betting you’ll live. [As far as we know, the life insurance companies or the reverse mortgage companies do not hire “hit men” to assure that you won’t live too long!]
And if you die earlier, then you’re simply dead, in which case you won't need the money – and that’s it – no problem. However, the tradeoff is that, if you live, you’re going to feel very secure knowing you’ll have a good guaranteed cash inflow for the rest of your life and never suffer not having enough money!
TWO STRATEGIES AFFECT THE AMOUNT
Take it out later in life and you'll get more - probably at age 75, maybe at 70. The later the better, as there are fewer life expectancy years, so they’ll pay you more per year. [If you can afford the cash flow, you'd do the same for your social security - see Financial Effectiveness Checklist.]
It’s better to take it out when interest rates are higher, as that gives you a greater amount per year.
SEE A PROFESSIONAL, TO COMPLETE ON THIS
It is very possible that you didn’t understand everything above, but the important thing is that you understand there is a strategy that is “reverse life insurance” and that you can go to a professional to implement it. Watch out for the non-professionals!!
