The Financial Risks of Living Longer.
Most of us aspire to live a
long, healthy and prosperous life. For many of us, that can become a reality only if we are well positioned in retirement.
A staggering 84 percent of Americans consider it important to have guaranteed monthly income in retirement but only 14 percent have purchased a guaranteed income solution that ensures lifetime income.
The financial downside
of living longer is the increased risk of outliving your wealth – referred to
as longevity risk. Recent studies
confirm this to be a major concern for millions of Americans.
“We are living longer and leading healthier lives
compared to just 20 years ago”, says the American Journal of Public Health. If you are 65 today and healthy, your life expectancy is near 90, another 18
to 20 years.
For many, living longer than planned may become the single most important financial
issue in their future. Twenty-five years ago, the idea of living past 80 was remote and that is important to understand why so many baby boomers and people already in retirement have been caught off guard about longevity risk. Having a financial plan to age 90 was not a priority when living to age 90 seemed unrealistic.
Managing Longevity Risk.
Ideally, you need a guaranteed, lifetime income stream
that pays you for as long as you are alive, regardless of anything - stock market conditions, interest rates, inflation
or another Bernie Madoff. You cannot outlive this retirement paycheck if structured properly. Too many people in or near retirement are invested too heavily in the stock market, creating a real threat to their nest eggs when the market has a normal correction. By re-balancing your portfolio, you can achieve security for life with safeguards against the most common threats.
The goal is to convert a
portion of your accumulated investments, including your IRA, into guaranteed income that is paid
by insurance companies over your lifetime. Working with an experienced retirement and life cycle planner will ensure that your
heirs will receive unused principal. Using specially designed longevity annuities, 100% of your investment should be liquid from day one while the principal is growing on a tax deferred basis.
According to Professor Roger Ibbotsen from Yale:
"Investors should be willing to pay an insurance premium to hedge away the longevity risk."
You need a guaranteed income solution if you
are:
·
At or near retirement.
·
Concerned about outliving current
assets.
·
Concerned about spouse’s well-being
upon your death.
· Invested heavily in bonds,
stocks or real estate.
·
In need of guaranteed lifetime income.
·
Concerned about losing investment
control if health is compromised.
· Do not have a retirement or longevity
risk planner.
A Private Pension - How it Works.
A 65 year old woman purchases a longevity annuity for a lump-sum of $500,000. In exchange, it will provide a guaranteed income stream of $39,762,
beginning at age 70. If she defers taking the income until she reaches 73, the payments jump to $51,494. The longer you
wait for the payouts, the higher they will be once you "flip the income switch within the contract".
From 73 to 90, she will receive $875,398, guaranteed. The same investment in bonds earning 4% will have been exhausted to Zero (see below). If she lives to 95, her guaranteed payments will total $1,132,868.
There is no principal risk. A longevity annuity is designed using indexing strategies. Simply put, this means that there is a guaranteed floor of 0% and maximum rate on the upside. When the market is up, the annuity will capture some of the gains and when the market is down, there will be NO LOSSES and that is guaranteed.
Return of Premium - I recommend contracts that are 100% liquid from day one (minus any disclosed contract fees). With this special guarantee in place, you are protected from unforseen events or a bad decision. With all of your capital GUARANTEED and LIQUID,
Longevity Annuity vs. Bonds?
There is no other investment that guarantees income for life. Only very strong, well capitalized insurance companies can do this.
Let's compare. If that 65 year old woman invests the same $500,000
at a 2% rate and begins to withdraw $39,762 per year, she will run out of
money at age 85, well before life expectancy.
At 4%, she will run out of money at age 90.
With life expectancy continuing to increase,
it is wise to adjust your retirement plan accordingly. An advisor who
is experienced in retirement and longevity planning will prove to be invaluable? As retirement becomes more of a reality, we will become the
most important advisor on your team.
Email Ted Bernstein or call 561-988-8984.
