Remember, if someone retires today at 65, he or she may have 20 or 30 years of income needs. Trying to figure out how to make your money last that long is a fairly daunting task. So a new approach called LONGACITY INSURANCE has become increasingly popular. These products allow you to create income insurance so that you have guaranteed rates of income insurance so that you have guaranteed rates of income.
Example, age 80 or 85 until your passing. Knowing you have an income starting at that later stage give you have an income starting at that later stage gives you the freedom to have to plan for only 15years of retirement instead of 20 or 30. Let me give you an example:
In a 2012 Wall Street Journal article titled “How to Create a Pension (with a Few Catches),” writer Anne Tergesen highlights the benefits of putting away $100,000 today (for a male age 65) into a deferred fixed-income annuity. This man has other savings and investments, which he thinks will last him to age 85 and get him down the mountain safely. But if he lives past 85, his income insurance payments will begin, and the amounts he receives will be staggeringly large compared with how much he put in.
“Currently, a 65-year-old man paying $100,000 for an immediate fixed annuity can get about $7,600 a year for life… but with a longevity policy (a long-term deferred fixed-income annuity—I know the language is long) that starts issuing payments at age 85, his annual payout will be $63,990, New York Life says.”
Wow. At age 65, if he makes a onetime deposit of just $100,000, his payments at age 85 are close to $64,000 per year!
Why is this so valuable?
Because at age 85, if he lives another ten or 15 years, he will get $64,000 every year, dwarfing his initial investment. But the best past is that he has to make his initial savings and investment last only 20 years, not 30 or 35. And with the volatility of markets and the inevitable challenges of sequence of returns, this task can be challenging for almost anyone.
I ran these number myself, and since I am only 54, my payments at age 85 would be $83,000 per year for the same onetime $100,000 deposit today! (And you don’t have to have a $100,000 lump-sum payment. It can be sizably smaller, which would also provide a smaller income.) That means if I live until I am 95, I would receive $830,000 in payments (10years x $83,000) for my $100,000 deposit. And I don’t have to wait until age 85 to turn on the income. The day I make the deposit, I’m given a schedule of what the annual income payments will be at any age I want to begin taking income. If I felt I needed or wanted money at age 65 or 75, I know exactly how much that’s worth to me.
Income insurance, when structured correctly and as part of an overall plan, is an incredible tool that reverses or eliminates the risk of living too long and becoming a burden on your family members. When I met with Alicia Munnell, director of the center for Retirement Research at Boston College, she echoed my enthusiasm: “So many people that I work with are very excited about and positive about the advanced-life deferred annuity, which is essentially longevity insurance.”
One more very cool thing?
The IRS looks very favorably on these deferred income payment (because a good chunk of the payment is considered a return of your original deposit).
This Article is taken from Money Master the Game
Written by Arshad. A