How Long Must Your Money Last?

Top 2. Jan 10, 2001 10:43 AM

» annneedle - Re: Good Job, Ann!

In response to message posted by bici:

Hi:

Well, if this isn't a good topic for the next article (or the one after that), especially after my cavalier attitude toward October's rocky market. Ouch!

Actually, I think I will take this up as a story idea in the next months, especially after sorting through my cache of sites and finding nothing that matches your description precisely -- which is ridiculous, considering all the calculators out there. And, with the markets not getting better in the near future, this should be a hot one.

Meanwhile, the closest immediate match I would recommend is www.financialengines.com. This one has been in the press a lot, thanks to the Nobel Prize its founder, Bill Sharpe, displays on his mantle. This site can at least tell you how much ground you could need to make up to retirement in light of your recent losses.

Well, I'm off to work on this piece -- thanks for the idea! Look for it by mid-February.

Cheers!

Ann

-- posted by annneedle

Top 3. Jan 12, 2001 4:20 PM

» snaimon - SPOUSAL Annuity

Just wondering what you think of a SPOUSAL Annuity feature of some TRADITIONAL large-company pension plans. It works like this. Say your pension is $50 K per year. For 10% ($5 K), you can buy a SPOUSAL Annuity. This effectively reduces your pension to $45 K per year. Should you die, your spouse receives a percent (say in this case 50%) of the original pension until she dies. In this case 50% of $45 is $22.5K. There is usually no provision for further survivorship or passing the pension annuity to someone else. It may be possible to chose a child rather than the spouse, but that hardly answers the question of how to provide for the spouse from the pension plan of the breadwinner.

CLEARLY, if the retiree dies immediately after starting his pension, he pays 0 or very little in and the spouse draws 50% of the pension. If she(he) lives a long time, clearly taking the spousal annuity was a wise choice. Also clear is the fact that, if the spouse DIES prior to the retiree, the $5 K per year is wasted. Also if the retiree (assume he/she retired at age 65) dies at age 85 and the same-aged-spouse lives to 86. In this case the retiree has paid in $5 K times 20 years of $100K for a benefit to the spouse of $22.5K. Those are about the extremes. Most likely, reality is somewhere in between those extremes.

For most retiring people (minimum age 62), term insurance is not going to come cheap. I have seen a RELATIVELY low-price GROUP term/whole-life hybrid insurance products. These policies may provide an alternative strategy. Instead of having everything down the tubes when the spouse dies, the proceeds of the insurance (used to support the spouse after death of retiree) may remain for the children or other heirs.

Anything you can suggest to read or thoughts on trade-offs?

Thanks,

Stan

-- posted by snaimon

Top 4. Jan 19, 2001 10:08 AM

» annneedle - Response to Stan: Spousal annuity

Hi Stan:

In response to your posting about the usefulness of setting up a spousal annuity from a company pension, here's my take...

Let's face it: Every "insurance" means paying for protection you may never need. However, in this case the spousal annuity trade-off seems a bit much -- basically, the account holder really "wins" only if he or she dies immediately after retirement, and the spouse can then inherit 50% of the pension. Ugh.

And you're right -- term insurance is an awfully expensive alternative at retirement age.

There are better alternatives out there. And I mean "better;" don't seek perfect. One is an immediate fixed or variable annuity, which basically can pay the account holder a monthly check while living, and can be maneuvered at purchase to give the surviving spouse about 10 years' worth of monthly payments.

Nope, this isn't perfect either -- but, at least it isn't a bet on immediate death. And, the price may be quite "competitive" with what is to be paid for the spousal annuity benefit. To find out, shop some annuity-buying sites, including annuity.com, annuityscout.com, and annuityshopper.com.

I'd love to hear back from you on what you found. Good luck!

Ann

-- posted by annneedle

Top 5. Jan 27, 2001 5:35 PM

» snaimon - Re: Response to Stan: Spousal annuity

In response to message posted by annneedle:

Thanks very much for the suggestions.

One minor correction or clarification first. The spouse does NOT inherit the pension, she just may collect it only as long as she lives.

One positive feature of the annuity is that THERE IS (or may be) SOMETHING TANGIBLE for the spouse or other survivors after my death.

Let's assume a $50 K pension and therefore a $5 K deduction yearly for the 50% spousal annuity upon my death. That would be $25 K per year.

Correct me if I am wrong, but the annuity option would call for an UPFRONT single payment, at least for an IMMEDIATE ANNUITY option. I have NOT shopped for these but basically wouldn't I need to deposit a VERY large sum into the single payment annuity to achieve the $25 K payout? See my example below.

With the variable annuity where one can PAY IN on a continuous basis, as I understand them. Now, let's say I pay in for 10 years at $5 K per year. The value of the annuity becomes $100 K -- just in theory. Then I die. From an old annuity policy I have, using a 10 year certain to life payout for my wife at her age 70 (assumes I retire at 60), the monthly payout factor is 6.4 per 1000. That is monthly $640 per month or 12 X 640 = about $8 K per year. That is nowhere NEAR the $25 K provided by the spousal annuity. Of course, this gap will decrease over time. AND it is true that part of the $8 K in a non-taxable return of investment.

The pension option calls for YEARLY (actually monthly) payments to guarantee or purchase the spousal annuity.

On another option.... I have seen combination term/whole-life policies that MIGHT substitute for the pension option. Roughly, at age 58 the premium is $1500 for $100 K insurance. Say I can buy $300 K worth of such insurance. With the above 10 year certain life payout option on the $300 K, that turns out to be $24 K per year, fairly close to the original $25 K of the spousal annuity payout. Here the beauty is that there are MANY payment options, one of which is to take the entire $300 K and live off the income.

ALSO, they say Universal or VULs now (age 51) are another possibility. I don't have the free funds now, however.

I am 51 and this in not TRULY something I have to decide today. I will be deciding what to do in 7 - 12 years. I have been looking for discussions on this topic, but have not found many.

Thanks again. What do you think?

Stan

-- posted by snaimon