If you’re in good health (at least above average), you can capture above-average returns from a special kind of investment.
That may sound crazy, but it’s not.
See, you pay money into a pool – along with a lot of other people your age.
Because you’re all the same age, as a group you all have the same life expectancy.
But, obviously, some of you will live longer than the others.
That’s why I say this is best if you’re in above-average health.
If you smoke, overdrink, overeat, underexercise, and are otherwise unhealthy, you won’t benefit as much.
This investment is called an annuity, and it’s a great way to “insure” yourself against the biggest risk of retirement – living longer than your money.
Life Insurance Companies Know When You’re Going to Die – On Average
Life insurance companies keep extensive records of how long people live because that’s their business. They want to make sure most policy owners are going to live long enough to pay more in premiums than the insurance company will have to pay upon death.
Annuities turn that around.
You pay the insurance company a large amount of money upfront, and then they keep sending you a monthly check until you die.
Now, you could put that large amount of money into a certificate of deposit or buy Apple shares or something else. Why would a life insurance company pay you more than these more common financial investments?
Because the insurance company pools your money with thousands of other people your age.
The company doesn’t know when you, personally, are going to die – or Dick or Jane or Sallie.
But it knows – with a large degree of accuracy – how many of you out of every thousand will die in the first year, the second year and on and on.
Therefore, it can calculate how much it can afford to pay the survivors. As the years pass, fewer and fewer people will remain alive to collect those monthly checks.
Example: You, Moe, Larry, Curly and 996 Others All Pay in $10,000
Together, you’ve all given the life insurance company $10,000,000. The company puts that money into very safe investments and estimates the return it will receive every year in the future.
The company takes some money off the top for itself.
Then it looks at its actuarial tables to see how many of the 1,000 people will die the first year. How many the second year. And so on, until everybody is dead.
The monthly checks stop upon death. Therefore, if two people die the first year, the company knows it will send out monthly checks only to 998 people the second year.
The number of check recipients will go down every year because somebody will die every year. Yet the overall investment pool remains.
If you buy one of these annuities at age 65 and live to 100, you’ll collect checks for 35 years. That’s how to win with annuities. Live longer than other people your age.
The life insurance company selling you the annuity knows somebody will live to be 95-100. They just don’t know it’ll be you.
That’s how you make sure you receive monthly income to pay your bills every month you pass away.
Types of Annuities
The simplest kind is called a fixed annuity. It works basically like I just described.
The one real problem with fixed annuities is that the monthly amount you receive is fixed. The insurance company calculates how much it can afford to pay you every month based on how much you pay upfront and how old you are.
How old you are tells them how long you’re going to live – on average.
They are then legally obligated to pay you that monthly amount for the rest of your life, even if it is another 35 or more years.
The one loose cannon with fixed annuities is inflation.
It’s been very low for the last 20 years, but will it remain so low for the rest of your life?
Nobody knows.
The $3,000 per month that gives you a comfortable lifestyle now at 65 may not pay your electric bill by 2055.
Social Security and most pensions go up every year based on inflation, so that helps.
However, I do suggest that, if possible, you save and reinvest at least 10% of your monthly annuity check, so you do keep up with inflation.
Variable Annuities Combine that Concept with Mutual Funds
These are the annuities salespeople will push you to buy. They’re very complicated, and most are expensive.
Your money goes into stocks, bonds, or other investments. And it grows tax-free.
Variable annuities are an excellent way to shelter income from taxes after you’ve maxed out contributions to your retirement accounts.
But they come with a huge number of choices. They may or may not be appropriate for you.
Therefore, you must seek the advice of an investment advisor.
Well-chosen annuities are a terrific way to turn a large chunk of cash into a stream of lifetime cash larger than you could get out of stocks or bonds.
But be careful to choose only the options you really need based on your situation.
