Written By: Robert Zimmerman | H&R Advisory Service, LLC
One of the main concerns in retirement years is: ‘Will my money last me as long as I live?
When you look at the low interest rates available for ‘safe money’ accounts, it is quite apparent that there is a legitimate reason for this concern. After all, if inflation runs at 3% and your savings receive 1.5%, you lose purchasing power even if you simply let the money sit in your account.
How is it, then, that an insurance company will offer a 5% cash flow and guarantee that you will never ‘run out of money’? And the offer does not require you to give up control of your money?
What we are talking about here is known as a ‘guaranteed lifetime withdrawal benefit’.
As it says, the account pays out for your entire lifetime and is a contractual guarantee. Also it is does not require ‘annuitization’ which forces you to abandon control of your principal.
The companies do make a fee charge to obtain this contract and the fee allows them to intelligently manage their commitment to you. They know all about how to calculate for mortality, since that has been their business plan for all time. They can actually pay you from your own principal and until they run out of that, they are not at risk. It is only for those who outlive their principal that they are ‘at risk’, and that is what the fee is to cover.
You can actually tell them to discontinue payments and send you the balance. Or you can leave it on deposit with them and start it up later.
Interest is earned on your deposit in a variety of ways, with the most prevalent being a credit linked to the performance of a stock index. This can never be less that a 0% credit, so you are not vulnerable to stock market losses.
If your goal is to simply be assured of an income for life, it matters little how much interest is earned on your account. It only determines how much of your account will be left over, if any, to go to your beneficiary.
There are now some companies that will guarantee an amount to be available to your beneficiaries. If that is a 4% benefit, and you only withdraw 4% from the account, then your principal should be left intact to your estate (if my math serves me correctly).
If you thought of annuities as wrong for you in the past, you will find the above information worth your time to investigate. Certainly, there is NO NEED to worry about using up your nest egg.
Note: Any information in this blog is not and should not be construed as investment advice.