Friday, December 11, 2009

Options to Avoid Outliving Our Savings

My first supervisor told me an interesting story about his late uncle. After amassing a respectable nest egg, his uncle retired at 65 and expected to die before 85, since his health was not good. He lived in a nice house, ate and dressed well, and took nice vacations, with a plan of exhausting his savings at age 85. Unfortunately, he lived until 95, in spite of his health issues. In the words of my supervisor, "The first twenty years were the best years of his life, the last ten were really tough."

Although I haven't talked to many retirees, I know that some are concerned about outliving their savings. I am one those that could have the issue of outliving our savings. Here are a few potential solutions we are considering to address the issue.
  • Maximize Social Security payments and have a pension or lifetime annuity. Although getting rarer, there are still defined benefit plans, also known as pensions, which pay for the entire lifetime of the beneficiary. Both pensions and Social Security make payments for the lifetime of the recipients and are adjusted upwards for inflation each year.

    My father-in-law retired after 30 years in the armed forces, with a full pension. In addition, he receives Social Security benefits. My mother-in-law receives a teacher's pension. My mom receives survivor spouse Social Security payments. Since my dad waited until 70 to start his benefits, my mom receives the maximum Social Security payment each month.

    For those like us, who do not have a pension, a lifetime annuity can be bought to duplicate some of the benefits of a pension, specifically the lifetime payments. For a lump sum payment between the ages of 55 and 65, one can purchase an annual stream of payments close the value of the lump sum beginning at age 85.

  • Monetize one's home. A paid off home significantly reduces debt expense, but can tie up a lot of funds in an illiquid asset. A reverse mortgage is one monetization option that allows the owner to withdraw equity from their home, and repay it upon sale or death. For more details on the process, see the reverse mortgage information at the U.S. Department of Housing and Urban Development website.

    Another option is to sell one's home and buy or rent a smaller home. This option will reduce monthly expenses (e.g. maintenance, utilities etc.) and provide significant funds to be invested for future use.

  • Work part-time. Earning money through part time jobs reduces the withdrawal rate , and therefore, extends how long the savings will last. Also, working part-time may improve the chances finding full time work, if needed.
  • At this point, we are considering maximizing our Social Security payments, downsizing once our children graduate from college, and doing part-time work to cover 20% of our annual expenses. For now, I am not comfortable with lifetime annuities, which carry the risk of the financial company and not paying. Also, since a reverse mortgage is basically debt, we would prefer not to use that option to generate funds.

    For more on Reaping the Rewards, check back every Friday for a new segment.

    This is not financial or retirement advice. Please consult a professional advisor.

    Copyright © 2009 Achievement Catalyst, LLC

    1 comment:

    MBAbriefs said...

    Great topic for a post. I'm a little surprised your old supervisor's uncle had it in his head he was going to die before age 85 and planned his financials accordingly. Hindsight is always 20/20 but with advances in medicine you can't assume you'll die at the same age as your parents and grandparents.

    I agree with your plan for retirement to downsize and work part-time. I don't expect to receive any SSA benefits since I'm 40 and SSA will most likely be broke by then due to the large number of retiring boomers and smaller numbers of GenX and GenY paying into SSA. I think it's a good idea to work part-time regardless of your financial status at retirement because it not only supplements your retirement it gets you out of the house and makes you feel like a contributing member of society.

    - David