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Case Study: Will I Outlive My Assets?

By , with Annuity FYI

According to a survey by Bankrate.com, 28 percent of Americans say that the specter of high medical expenses worries them the most, compounding the general fear of running out of money.

Florence Henderson, a 68-year-old widow in Dallas, used to be in a financial trap shared by countless retirees. She was far from broke – she had a net worth of about $500,000, a small pension and Social Security – but she was constantly fretting about money.

Her income covered her monthly bills, but only barely, and so she regularly had to withdraw money from the bank or her investments for relatively little things, such as going out to dinner, buying a new blouse or footing the co-pay on a new prescription.

Henderson’s financial advisor – Scott Sadar, an executive vice president at Somerset Wealth Strategies in Portland, Ore. – hears stories like this all the time. In fact, they account for about a third of the calls he gets from prospective clients. He knows all too well that money troubles – or at least perceived money troubles – are depressing many older people.

“More folks are becoming concerned about running out of money in retirement,” Sadar says. “The pain and discomfort I hear all the time is that they have what they have and interest rates are not high enough for them to live off the interest.”


But there is hope, at least for those in relatively good health for their age, because none of these people are destitute. Sadar estimates that most potential clients who call him have a net worth of $400,000 to $800,000— not a lot if you no longer work, but not peanuts, either. Sadar believes most of these people could improve their situation simply by taking $100,000 of their savings and purchasing an immediate annuity with a feature called “life with 10-year period certain,” thereby locking in guaranteed lifetime income.

Henderson — whose name has been changed to preserve her privacy — is happy that she purchased a $100,000, 10-year period certain single premium immediate annuity. She receives $518.50 a month for the rest of her life. If she lives to age 84 – likely in her case – she will have recouped the $100,000 and reap what Sadar calls a “force multiplier” – the receipt of more money than she invested, and with no market risk.

This certainly doesn’t make Henderson rich, and, yes, she will actually have more money only if she lives to an old age. But she feels much better psychologically, knowing she will never be completely locked out in the cold if something happens to Social Security or her pension, and that is what counts. “It is very stressful when you’re spending more income than you have coming in,” Sadar says. “Having some guaranteed income is a good way to mitigate stress and uncertainty.”

Rampant Financial Stress

Experts say – and multiple surveys confirm — that financial stress is rampant among the older set.

“We’re seeing the first generation of retirees who have some accounts beyond just a pension,” Anne Coveney, a researcher at mutual fund giant T. Rowe Price who follows investor trends and behaviors, recently told TheStreet.com. “They may have 401 (k) plans, as well as pensions. But the pensions are not as much of a source of income as in previous generations.”

According to a survey by Bankrate.com, 28 percent of Americans say that the specter of high medical expenses worries them the most, compounding the general fear of running out of money. A couple who retired in, say, 2014 will need $220,000 to cover healthcare costs in retirement, according to a recent estimate from Fidelity Investments. This isn’t only a big price tag; it’s an uncertain one. People can reasonably budget for living expenses, but health care costs and longevity are wild cards.

In particular, retirees — most of whom live on fixed incomes — are getting hit all over the place, victims of the sad fact, among other things, that interest rates on their savings and investments sit near record-lows.

Insured Retirement Institute Survey

The Insured Retirement Institute’s (IRI) Boomer Expectations for Retirement 2016 survey found that the percentage of boomers confident that they’ll have enough money to last throughout retirement – 24 percent – is the lowest since the IRI began conducting its annual poll in 2011.

Other surveys flesh out why this is happening. A recent one by New York Life of Americans age 40 and older with household incomes of at least $100,000 found that 58 percent of Americans overestimate how much they can safely withdraw from retirement savings.

Worse, New York Life learned, 31 percent said they believe they can spend 10 percent or more of their savings each year in retirement. (Experts say annual spending should not exceed 4 percent of savings.) At this rate, New York Life estimates, these retirees would risk running out of money in 11 years or less. Most expect to live significantly longer.

There is zero good news in this survey. Even though retirement is closing on boomers who have yet to retire and the economy has haltingly improved, the IRI also found that the percentage of boomers who have saved for retirement has actually been falling. Just 55 percent of boomers say they have saved for retirement, down from 58 percent last year and the second-worst figure in the last four years.

In addition, almost twice as many boomers this year have taken premature withdrawals in comparison to last year’s survey – 16 percent versus 9 percent. The reasons may be valid – caring for care of aging parents, for example, or helping grandchildren pay college tuition – but the bottom line is that they are placing themselves at risk of falling into poverty.

Florence Henderson’s Heirs

Dallas widow Henderson, who is now enjoying relative financial peace of mind, hasn’t forsaken her heirs.

Her 10-year-period-certain contract means that a beneficiary will receive her payments if she dies before age 78. (Immediate annuity buyers can instead purchase a life with installment refund option for $23.20 monthly, offering a bit more flexibility but reducing monthly payouts to $495.30 monthly. For somewhat younger people or for those worried about longevity, it may make more sense to buy a ladder of fixed annuities, which pays less but preserves principal, plus provides a partial hedge against rising interest rates.

What Henderson knows and others in her generation should understand is that retirement, in effect, is the longest vacation they will ever take. Many people spend weeks, sometimes months, planning a vacation, but seldom spent nearly that much time planning for retirement. It’s crucial to do some research, prepare yourself and take steps to insure that you don’t outlive your money.

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