How many of us are absolutely terrified of old age? It must be much more than 50%. That’s because nearly that number, or 45%, have admitted to worrying about just one of many horrifying risks, the risk of outliving their money.
By the way, those expressing this fear include a third of millionaires (defined as those who have at least $1 million in “investable assets,” excluding real estate and retirement accounts – meaning most of them have a net worth well above the $1 million is). Among non-millionaires this percentage is 47%.
Outliving our money is perhaps the greatest financial fear of growing older: it raises the specter of going bankrupt and becoming dependent on the kindness of strangers just when we are most defenseless.
But to this we must add all the other concerns: fear of loneliness and isolation; fear of becoming a victim of elder abuse by home care workers or nursing home staff; and fear of the pain and humiliation of a debilitating disease.
So if 45% are only worried about running out of money, the total number who fear the last act of life must be much higher than that.
These numbers – 45% of Americans worry 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 should we think of this? One of the interesting issues is how few people seem to have heard of, or are aware of, the existence of simple insurance contracts that ensure your money lasts as long as you do: single premium lifetime annuities.
These convert a lump sum into a stream of monthly checks that will continue until death, whether it comes sooner or later. They work like a kind of reverse life insurance: those who die young subsidize the payments for those who earn “old bones.”
Amid the gloom about your money’s survival, there’s some good news. These lifetime annuities now offer a better deal than at any time in more than a decade. Payout rates have increased dramatically over the past two years. Perversely, you can thank the inflation panic, bond market turmoil and rising interest rates.
In other words, whoever is responsible for the inflation crisis—the President, the Fed, the Illuminati, the Smurfs, or whoever—has inadvertently done a great favor to those who are about to retire or are about to retire. retire, and are concerned about inflation. 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 top quality government and corporate bonds. So the higher the interest paid on these bonds, the more interest your prepaid premium will earn – and therefore the more the insurance company can pay you back each month.
For example, right now a 65-year-old man with $100,000 could buy a lump sum, paying $7,650 per year for life. This is not a king’s ransom. But it’s 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.
Benefit rates for women are lower for the simple reason that women tend to live longer. Today, $100,000 could buy a 65-year-old woman a lifetime income of $7,300. Two years ago this was just $5,700.
Among all those planning for their own retirement, there is a lively and ongoing debate about whether the so-called “4%” rule is still valid, and how much risk it poses. This rule, created by financial planner Bill Bengen in the 1990s, states that a retiree with a reasonable portfolio of stocks and bonds should be able to start withdrawing 4% of his portfolio in the first year, and withdraw that amount each year. increase to maintain his portfolio. with inflation, and be pretty sure the money will last until they die.
Meanwhile, annual payout rates on lifetime annuities for someone age 65 are now around 7.5% (slightly higher for men, slightly lower for women).
To be fair, these annuities do not offer any inflation protection or adjustment. But you can buy annuities that do. For example, that 65-year-old man with $100,000 can buy a lifetime annuity whose payouts increase at a flat 3% per year – well above the Fed’s 2% target.
In today’s annuity market, his first-year income will be $5,700 – a payout ratio (obviously) of 5.7%, well above the 4% rule. For a woman, the equivalent amount is $5,150, a payout ratio of 5.15%, ditto.
Single-premium lifetime annuities can be purchased as “immediate” or “deferred” – in other words, so that payments begin immediately, or sometime in the future. This means that they can also be used as longevity insurance, for example. A 55-year-old man can spend $100,000 now and buy an annuity that will pay out $54,000 a year starting at age 80 — assuming he makes it that far.
Economists have long struggled with what they call the “annuity puzzle” – the puzzle is that so few retirees are buying these annuities. There are some obvious disadvantages: the money is usually gone when you die, leaving no inheritance for heirs, and if you buy the annuity you lose free access to that lump sum. And if you buy annuities when interest rates are low – as happened a few years ago – you remain exposed to inflation. On the other hand, annuities are an efficient way to convert a lump sum into the equivalent of a lifetime pension. There’s no easier way to squeeze the most guaranteed lifetime income out of a pile of cash.
These lifetime annuities are not to be confused with all the other things called “annuities,” like variable annuities and deferred fixed-rate annuities, which are essentially tax-deferred investment accounts. (Because they often come at a high cost, they’re 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 to summarize: people are afraid that they will run out of money in their old age, there are financial products available for that, and they don’t want them.