Singing About Aging
Thinking About Cash Flow
September 14, 2015
- Even some of the staunchest Beatles fans are surprised to learn that one catchy tune from the Sgt. Pepper's Lonely Hearts Club Band
album about reaching a certain age was one of the first songs Paul McCartney ever wrote, by some accounts as early as age 16 when the band was still calling itself The Quarrymen.
Give "the cute Beatle" points for looking almost fifty years into the future to ponder love, life and, even if he was doing so unintentionally, joint life expectancy.
Today, married couples probably don't think enough about joint life expectancy but if they want to make sure their retirement assets last as long as they do, they should.
Fortunately, one "band" that calls itself the Society of Actuaries (SOA) thinks about this kind of thing a lot. These studious lads (and lasses) may never have charted any singles but the work they do is as vital to life as music, if not more so.
In its Phase 1 (of a four-phase project) Baseline July, 2015 research newsletter on "Optimal Retirement Income Solutions in DC Plans," the SOA authors analyze various retirement income generators (RIGs) with the goal of evaluating the pros and cons of each method to find the optimum solution for ensuring steady cash flow for life.
You'll Be Older, Too
(Full Disclosure: One of the authors, Dr. Wade Pfau, was one of my professors during my Retirement Income Certified Professional� studies through The American College)
This report is YET ANOTHER
in a series of studies we keep finding that points to the advantage of life annuities to meet one's future income needs.
Here are a few of the highlights we especially liked with our own emphasis added
"RIGs that pool longevity risk (annuities) provide higher expected lifetime retirement income
than investing approaches that self-fund longevity risk." (p. 8)
"An effective compromise may be retirement income solutions that dedicate a portion of savings to annuities
and remaining assets to investing solutions to realize the advantages of both." (p. 9)
(NOTE: Check out some of our recent newsletters
and blog posts
. We've been advocating this approach for years.)
"Traditional annuities produce higher expected average retirement income
than SWP (Standard Withdrawal Plan) strategies due to longevity pooling." (p. 12)
This last one is worth analyzing a bit further.
The classic "four percent" draw down approach (a common SWP where retirement assets are invested in a mix of stocks and bonds and retirees withdraw four percent of the principal each year to live on hoping what remains will earn enough to allow the money to last a lifetime) has recently been called into question
So much so than this SOA paper didn't even consider this approach as an option since prior research "showed this method failed (savings were exhausted) in unfavorable investment scenarios
Translation: The four percent thing works great when it works. But it doesn't always work.
Saving the best part of the report for last, it doesn't get any more straightforward than what the authors concluded about a hypothetical sixty-five year old female with $250,000 in retirement assets:
"SPIAs (Single Premium Immediate Annuities) produce
highest income with lowest risk." (p. 23)
For married couples, the case for annuities is even more compelling.
Everyone has a statistical probability of living to a certain age. But when that same person marries, the chance that one of them will live beyond their individual life expectancy increases by a significant factor.
NOTE:If continuation of cash flow to a surviving spouse is important to ANY married couple, placing value on these statistical probabilities should be a top priority.
This calculus also extends to same-sex married couples
by the way though it is unknown to what extent outcomes might vary. Additional research is needed.
Here's a quick look at how this plays out for a sixty-four year old married (male, female) couple courtesy of our bean-counting friends at the SOA (individual chances in parentheses):
Thank you for the opportunity to be of service and best wishes for continued success in your personal and professional lives.
72% chance one of them will live to age 85 (Man: 41%, Woman: 52%)
45% chance one of them will live to age 90 (Man: 19%, Woman: 31%)
18% chance one of them will live to age 95 (Man: 6%, Woman: 18%)
If want to see what YOUR OWN
chances of living to a certain age will be, Vanguard has a nifty interactive "Plan for a long retirement"
tool you might like. It's a fun (and possibly frightening) exercise.
So whether you're trying to decide what to do with an anticipated personal injury settlement, a larger-than-usual attorney fee or the current 401(k) balance you've managed to accumulate during your working life, I hope this information on life expectancy has given you something to think about.
Dan Finn, CPCU, CSSC, RICP�
Master's Certified Structured Settlement Consultant™
Retirement Income Certified Professional�
NOTE: This newsletter is presented for educationalpurposes only using material freely available in the public domain and should not be construed as tax or legal advice. All rights reserved.
Guitar image courtesy of Iamnee at FreeDigitalPhotos.net