Why My Nest Egg Only Need Last to Age 70

No, I am not going to kill myself.  But this post presents an option for people with no children or heirs or people not worried about leaving money to their heirs.  The idea is total annuitization at age 70 (or there about, as I will explain).

If you are not yet familiar with immediate annuities, then please read about the basics. The beauty of the immediate annuity is the lifetime payment option.  You can set it and forget it, like a kitchen appliance. So my plan is to simply maintain my current nest egg (about $2 million) to age 70.  Thereafter, it goes into immediate annuities.

For those of you who think $2 million is a lot, maybe you live in Alabama. But living outside of San Francisco where a modest 4 bedroom 2.5 bath home costs $1+ million and my wife easily puts $8,000 monthly on the credit card, I am not rich by any standard.  We both drive Priuses, live in the modest home as described and do not take fancy vacations.

Back to the immediate annuitization. Each year you wait to buy an immediate annuity means you will get more monthly income.  The idea here is simple.  The fewer years the annuity company needs to pay you, the more they will pay you per year. The payout below (based on today's rates) looks like this on a $1 million deposit:

Note that once the deposit is made and payments start, the monthly payment remains the same for life. Note also that the cash on cash return is 8%.  Where can you get that rate in this low-rate economy, guaranteed by a large financial company?  Compare this to 3% on highly rated long term bonds. (For extra safety, you can of course divide the investment among several life insurance companies). Note that the payout rate is not the internal rate of return.  It is  simply the cash-on-cash yield.

The negative aspect of immediate annuities is that if you die 3 months after making your $1 million deposit, the annuity company keeps the money.  As I stated above, the life annuity is a good option for people not concerned with leaving an inheritance.  If you die prematurely, this will have turned out to have been a bad investment–but you won’t care! The positive aspect is that the insurance company will keep paying the monthly amount as long as you live.

An additional aspect to this is that you can choose when to start this arrangement or even "dollar cost average." Let's assume that you are age 68 and plan to start such an arrangement at age 70.  But over the next few months there is a big spike upward in interest rates.  You could take advantage of that as these annuity payout rates are based on overall rates in the economy.  Therefore, you can take advantage of good timing.  Of course, if there is no spike and you don’t know the best time to invest, you could divide your nest egg into parts, say 4 equal parts.  Invest ¼ at age 70, ¼ at age 71 and so on.

The point is that rather than worrying about having your money last until 100 in the light of you lasting until 100, this is a worry-free option. Of course, nothing is perfect. Some readers will argue that I have not addressed the safety aspect. To that I say: given that companies like Prudential and NY Life made it through the great depression, I will take the risk we don't have another during my lifetime and invest with those companies.

Others will argue that I have not take inflation into account.  To that I respond:

• I can always take a reverse mortgage on my home
• My expenses will drop as I age
• I can always move to Alabama

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