Detroit Lion 1950s football star quarterback Bobby Layne once said his retirement plan was to die when his money ran out. He was pretty much right on and died a relatively young and close to broke man.
One of the most difficult things for investment professionals to create for clients is a lifetime income plan that meets all their needs. The two biggest hurdles to consider are creating sufficient immediate income and the possibility of needing that income over a very long period of time.
In the past it was acceptable to create a systematic withdrawal plan from mutual funds or use dividends from common stock to illustrate a consistent income stream. The 2008 market meltdown taught us that events not in our control could disrupt the best conceived plan. Both planners and clients discovered they needed to be a bit more cautious in their income plan design. Any sudden market implosion could slice years off the assets needed for income. A drastic drop in the markets plus an aggressive withdrawal plan is a doubly whammy to disrupt any plan.
Blue chip global stocks with a history of paying increasing dividends are not immune from abandoning shareholders and eliminating dividends.
Fixed annuities are also little help during periods of low interest as insurance companies need higher yields to provide more attractive fixed long-term income.
Finally, even during relatively benign periods of consumer prices increases fixed income plans are at the mercy of cost of living hikes. A simple 2% annual inflation rate can compound and reduce the purchasing power of a dollar in as short a period as a decade by as much as twenty-five percent.
The partial answer for long-term income seems to be longevity insurance. While this writer is not a great lover of the insurance industry they seem to have arrived with a product that solves some of the problems of a client living too long. Longevity insurance is basically a fixed deferred annuity with a starting date far into the future.
The mechanics are simple enough. A client who is age 65 desires to ensure that he will receive $1,000. a month for life beginning at age 85. For that agreement he pays a one time premium (currently with some companies less than $20,000. for the $1,000 a month). This amount is not only cheaper but about 10% of the amount of a single premium immediate annuity. If the client wants income for his spouse there is a separate policy that has to be purchased.
I like this for several reasons: (1) A retiree can get a bit more aggressive with creating more immediate income. (2) A retiree does not tie up a tremendous amount of money to buy a deferred income annuity. (3) It’s an actuarial product that doesn’t 100% depend on current interest rates.
Before you decide to buy this product you need to do some homework: You have to ensure the company who is issuing the product is currently in great financial shape. The reason is that the guarantees are with the company and not an independent outside firm.
Next you have to answer if there is a history of living a long time in your family? If all your relation’s lifespan only make it to the national average the chances of getting value is little and none.
Do some immediate income planning. How much do you think you need now and if spending down assets how much income will you need down the road. Run the inflation calculation using one of the calculators at my web site at www.primaryplanner.com.
And finally, if you neglected to buy long-term care insurance and everything else being equal you may be able to fund a self-created income stream for exactly that future purpose.
As always call me for direction and assistance.
Questions call Paul @ 877 783 7080 or write him at pstanley@westminsterfinancial.com. Share this blog with someone who cares about their money.
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