Live It Up in Retirement
Jonathan Clements, Wall Street Journal
July 24, 2005
Quick, hide this column from your children.
Sure, you would like to bequeath them a few bucks. But you also want to enjoy your retirement. And that, frankly, is a problem, because you really don't have enough saved.
You could fiddle with your portfolio, in an effort to eke out more income. But in the end, if you want to give your standard of living a significant boost, you need to consider three strategies. The downside: If you employ these strategies, you will likely die with precious few assets -- and that means a skimpy inheritance for the kids.
Immediate Gratification
Despite that drawback, I think the three strategies below will become increasingly popular. The reality is, as the baby boomers approach retirement, many will realize they can't generate enough income with a conventional portfolio of stocks, bonds and mutual funds.
Their choice: They can spend their remaining days pinching pennies -- or they can adopt some variation on what I call the three-check strategy. What's the strategy? The idea is to crank up your income by collecting three handsome checks each month.
One of those checks would come from an immediate annuity that pays lifetime income. With these annuities, you hand over a wad of money to an insurer, in return for which you get a check every month for life.
For instance, according to
www.immediateannuities.com, if you are age 65, a $100,000 investment would buy annual income of $7,848 if you are a man and $7,392 if you are a woman. No other low-risk investment will give you that sort of income.
There are, of course, disadvantages. Annuity payments are usually fixed, leaving you vulnerable to inflation. You can sidestep this problem by purchasing the new inflation-indexed annuity offered by Vanguard Group in Malvern, Pa.
According to
www.vanguard.com, a $100,000 investment would buy initial annual income of $5,531 if you are a 65-year-old man and $5,058 if you are a woman. Thereafter, your income would climb each year along with inflation.
Inflation, however, isn't the main reason retirees resist annuitizing. Rather, they hate the idea that they might buy an income annuity and die soon after. If that happened, their initial investment would be gone and they would have received scant income in return. Because of that risk, you shouldn't buy a lifetime-income annuity unless you are confident you will live well into your 80s.
It Pays to Delay
Vanguard's annuity might sound like a novel idea. But in fact, seniors have enjoyed the benefits of this sort of annuity since 1975, when Social Security retirement benefits were first linked to inflation.
Like the idea of inflation-indexed income? To collect even more, all you have to do is delay the start of your Social Security benefits. For instance, if you were born between 1943 and 1954 and you were eligible for a $750 monthly Social Security check at age 62, you could garner $1,000 a month by postponing benefits until age 66.
As sharp-eyed readers will notice, I am ignoring inflation. That doesn't affect the trade off, because inflation would give an equal percentage boost to both numbers.
Just as retirees resist immediate annuities, so they also dislike delaying Social Security. One reason: People fear they will die without collecting much in benefits. Indeed, you shouldn't postpone Social Security until 65 or 66 unless you think you will live until at least your early 80s.
For some reason, many seniors also assume that delaying Social Security means delaying retirement. That isn't necessarily so. You could retire at age 62 and then live off your savings until you start benefits at 66.
That may mean less money for your heirs. But it can be a smart move for income-hungry retirees, because Uncle Sam makes delaying benefits awfully attractive. To understand why, suppose you opted for the $750 monthly benefit at age 62.
But instead of spending the money, you invested it. Let's say that, over the next four years, your $750 monthly investment clocked a 3% annual return -- which would be a handsome gain, because I am assuming no inflation and no taxes.
That would give you $38,294 at age 66. If you then used that sum to buy an inflation-indexed lifetime-income annuity from Vanguard, you would get monthly income of $183 if you are a man and $167 if you are a woman.
A good deal? You could have done far better by simply delaying Social Security until age 66. That way, you would have received $1,000 a month, $250 more than at age 62.
Postponing benefits is especially appealing if you are married, says Henry "Bud" Hebeler, who runs
www.analyzenow.com, a Web site devoted to retirement issues. "When the primary breadwinner dies, the spouse can get 100% of the breadwinner's benefit as a survivor's benefit," he notes. "For married people, it's a heck of a deal."
Reversal of Fortune
If you opt for both the annuity and delayed Social Security, you will get two handsome checks each month. Where will the third check come from? You could take out a reverse mortgage and, depending on the loan program, receive the proceeds as a lump sum, a line of credit or a monthly payment.
While I think all retirees should seriously consider delaying Social Security and annuitizing a portion of their savings, I am much less keen on reverse mortgages because the costs involved are pretty steep.
Indeed, before you consider a reverse mortgage, you should first trade down to a less-expensive home. That will not only free up home equity that can then be spent, but also it should trim your property taxes, maintenance expenses, homeowner's insurance and utilities.
If that still leaves you short of income, then consider a reverse mortgage. Look on the Internet at
www.aarp.org/revmort and
www.reversemortgage.org to learn more.
Yes, taking out a reverse mortgage means that, after your death, your kids may get little or no value out of your house. But as I see it, you get just one shot at retirement. For once in your life, maybe you should be a little selfish.
