How Long Will My Money Last?

How long will my money last?

This is the number one concern of people planning for retirement. Since the end of most defined benefit plans, this has been on the minds of most people as they approach retirement, and those who recently entered retirement. While those waiting to enter retirement have the flexibility to ask this question now that the market has recovered from the crash of 2008-2009, those who retired and counted on those stock market based products to keep their income stream solvent have reason to worry. Consider this; a man, retiring at age 65 has a life expectancy of 16.8 years more. A Woman retiring at the same time has 20.12 more years of life expectancy. 

At the same time, both have more than a 25% chance of living into their 90s! This should cause us to wonder, if we are living longer, how can we make our income last as long as we do? At a 4% rate of return, it would only take 54 months to exhaust a $5,000 monthly payment on a $250,000 nest egg. Not long, eh? What if the returns went negative, or less than 4%? Then would not the retiree have to re-examine their lifestyle and expenses?

Since CDs are paying significantly less than 4%, how else could someone guarantee that they would not outlive their nest egg?

In many cases, this calls for a ‘Split Annuity’. A split annuity plan works like this:

The advisor and client determine the total amount of baseline income to be guaranteed. Subtract social security payments. The difference is what is needed to be guaranteed for the life of the client. 

Taking the $250,000 example and assuming an interest rate of payout of 3% over 120 months, the retiree implements what is called an ‘immediate annuity’.  The income differential between social security and the $5,000 needed for retirement is $1500 per month. The deposit required to pay this amount on a guaranteed basis is $$93,000 The balance in placed in a deferred annuity for generates a lifetime income of $1,560.  This income cannot be outlived. 

For many people this process works because it builds in two guaranteed sources of income, while at the same time providing peace of mind and a certain knowledge their requirement for income for their entire life will not be outlived.

If I can be of assistance in explaining how this strategy can help with your retirement income planning, please contact me through the website at srins.com, or by phone at (952) 649 0504.

February 18th, 2014 by Scheiber & Associates