How never to outlive your money

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How many of us are absolutely terrified of old age? It must be way more than 50%. That’s because nearly that number, or 45%, have admitted to worrying about just one of the multiple horrifying risks, namely the risk of outliving their money.

Those expressing this fear, incidentally, include a third of millionaires (defined as those who have at least $1 million in “investable assets,” excluding property and retirement accounts — which means most of them have a net worth far in excess of $1 million). The figure among non-millionaires is 47%.

Outliving our money may be the biggest financial fear about growing old: It raises the specter of going broke, and becoming dependent on the kindness of strangers, just when we are at our most defenseless. 

But to this, we need to add all the other worries: Fear of loneliness and isolation; fear of being subject to elder abuse at the hands of home help or nursing home staff; and fear of the pain and humiliation of debilitating illness.

So if 45% worry just about running out of money, the total number who are afraid of life’s final act must be much higher than that.

These numbers — 45% of Americans worrying about running out of money before they die, including 33% of “millionaires” — come from a new survey published by Northwestern Mutual. The survey of just over 2,700 adults was conducted by The Harris Poll.

What are we to make of this? One of the interesting issues is how few seem to have heard of, or be aware of, the existence of simple insurance contracts that make sure your money lasts as long as you do: Single-premium lifetime annuities.

These convert a lump sum to a stream of monthly checks that will last through death, whether it comes early or late. They operate as a kind of reverse life insurance: Those who die young subsidize the payments for those who make “old bones.” 

Amid the gloom about outliving your money, there is some good news. These lifetime annuities are now offering a better deal than at any time in over a decade. Payout rates have rocketed in the past two years. You can thank, perversely, the inflation panic, the turmoil in the bond market, and soaring interest rates.

In other words, whoever is responsible for the inflation crisis — the president, the Fed, the Illuminati, Smurfs or whomever else — has accidentally done a big favor for those who are about to retire or who are nearing retirement, and who are worried about running out of money.

The technical reason, for those who care, is that when you buy a single-premium annuity, the insurance company, for sound regulatory and financial reasons, invests all the money in government and top-quality corporate bonds. So the higher the interest rate paid on those bonds, the more interest your up-front premium will earn — and, therefore, the more the insurance company can pay you back each month.

Right now, for example, a 65-year-old man with $100,000 could buy a single-premium annuity paying $7,650 a year for life. This is not a king’s ransom. But it is the best rate since 2011. Two years ago, before the inflation panic, that same $100,000 would have bought a 65-year-old man an annual income of just $6,000.

The payout rates for women are lower, for the simple reason that women tend to live longer. Today a woman of 65 with $100,000 could buy a lifetime income of $7,300. Two years ago, the figure was just $5,700.

Among all those planning for their own retirement, there is a lively and perpetual debate about whether the so-called “4%” rule is still valid, and how much risk it entails. This rule, created by financial planner Bill Bengen in the 1990s, argues that with a reasonable portfolio of stocks and bonds, a retiree should be able to start out by withdrawing 4% of their portfolio in the first year, raise that each year to keep up with inflation, and be pretty sure the money will last until they die.

Meanwhile, the annual payout rates on single-premium lifetime annuities for someone aged 65 are now around 7.5% (slightly higher for men, slightly lower for women). 

These annuities, to be fair, do not have any inflation protection or adjustment. But you can buy annuities that do. That 65-year-old man with $100,000, for example, can buy a single-premium lifetime annuity whose payouts rise by a fixed 3% a year — well above the Fed’s 2% target.

In the current annuity market, his income in the first year will be $5,700 — a payout ratio (obviously) of 5.7%, well above the 4% rule. For a woman, the equivalent figure is $5,150, a payout ratio of 5.15%, ditto.

Single-premium lifetime annuities can be bought either as “immediate” or “deferred” — in other words, for the payments to start straight away, or to start sometime in the future. That means they can, for example, also be used as longevity insurance. A 55-year-old man can spend $100,000 now and buy an annuity that will start paying out $54,000 a year once he turns 80 — assuming he makes it that far. 

Economists have long grappled with what they call the “annuity puzzle” — the puzzle being that so few retirees buy these annuities. There are some obvious downsides: The money is typically gone when you die, leaving no legacy for heirs, and when you purchase the annuity you lose free access to that lump sum. Also, if you buy annuities when interest rates are low — as happened a few years ago — you are left exposed to inflation. On the other hand, annuities are an efficient way of converting a lump sum into the equivalent of a lifetime pension. There is no simpler way to squeeze the most guaranteed lifetime income out of a pile of cash.

These lifetime annuities should not be confused with all the other things labeled “annuities,” such as variable annuities and fixed-rate deferred annuities, which are effectively investment accounts with tax-deferral wrappers. (As they often come with high fees, they are very much a mixed bag.)

These single-premium lifetime annuities are terrible sellers. Last year they accounted for just $11 billion in U.S. sales, while the other types of “annuities” raked in $300 billion. 

So, just to recap: People are worried about running out of money in their old age, there are financial products available for that, and they don’t want them.

Go figure.


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