As I mentioned previously, cash flow is of paramount importance in retirement. Eventually, real estate or partnerships must be turned into something more liquid to live on. But here is another potential problem in retirement most people haven’t considered: what if you live too long and are too healthy?
No, that was not a typo. Living too long can mean outliving your money especially given the effects of inflation. If you retire at 62 years old and live to be 97, do you really have enough assets saved to live on for 35 years?
And what about being too healthy and active? Most people dramatically slow down their spending as they age due to normal health issues and a decrease in overall activity. But some people remain quite vibrant into their 80s or 90s, continue to travel, maintain their house and remain very active, experiencing no significant slowdown in their lifestyle or spending habits.
Maybe you have Social Security along with a lifetime pension from work. Fewer and fewer people have pensions, but instead have 401(k) accounts. Did you know it’s possible to essentially “buy a pension” with 401(k) assets, IRAs or non-retirement assets?
The insurance industry calls this a guaranteed lifetime withdrawal benefit, which can have even better attributes than a standard pension. The “guaranteed lifetime withdrawal benefit” is a rider to a fixed-index annuity, which we discussed in Part One: Invest Better.
For example, Bill and his wife Betty do not have a pension, but both have longevity in their families and want to not only reduce market risk (the risk of loss in the stock market), but also longevity risk (the risk of outliving your money).
Bill decides at age 60 to invest retirement money into a fixed-index annuity. The product allows their investment to grow with the stock and bond market returns in years where the markets increase. When the markets go down, their investment account does not.
Years after the investment, Bill decides to turn on the lifetime cash flow payments. Once started, these payments continue as long as either Bill or Betty are alive, no matter how long that is. In some cases, these payments increase over the years. Finally, if both Bill and Betty die prematurely, the remaining balance in their underlying investment account can go to their heirs.
Using a “guaranteed lifetime withdrawal benefit” can be an important part of a retirement plan since it can provide growth, cash flow, inflation solutions, and protection.