“Why hasn’t anyone ever told me about this?” she asked.
She was at the same time relieved, chagrined, and just a tiny bit angry.
Like many facing retirement, she had started later than she now wished she had and was facing the prospect of a significant lifestyle change. Sure, she could keep spending money in retirement just like she did during working years…as long as retirement didn’t last too long.
“I don’t care about leaving anyone rich, but the thought of running out of money or moving in with my kids…no thanks. I think I’ll just eat a lot of tuna fish.”
She had come to me asking me to explain all her options on how to turn her retirement nest egg into monthly income.
The thought of having a lot of money in the stock market made her sick at her stomach. And when the government announced that interest rates were going back down, she nearly threw her shoe at the TV. She knew that meant the meager rates her bank was paying her on safe money was going even lower.
“OK, here’s another option,” I continued.
“A financial institution can pool the money of a large number of people who are the same age. By pooling same age people, they can very accurately calculate how long the average person in the group is going to live.
“By definition, half of the group will live to the “average” point and half will live beyond it. For every person that lives a longer-than-average time, there will be a person who lives a shorter-than-average time. Mathematicians and statisticians call this actuarial science using the law of large numbers.
“What that means to you is that for every dollar you put into the pool, the financial institution can pay you about twice what you’d be able to safely take out of your own money if it was all by itself. And they can guarantee to pay that amount to you for life, no matter how long you live.”
That’s when she said the part about, “why hasn’t someone ever told me about this?”
“Hold on,” I cautioned. “It’s not all Disney World and free passes. The financial institution is an insurance company. The product I’m describing is called a guaranteed income annuity. And you are making a trade with the insurance company – you give them your money and they give you a guarantee that they will send you a check every month for the rest of your life.”
“Oh,” the understanding was coming across her face. She was thinking.
“But if I put my money in a bank or an investment company, I can’t really touch it anyway or they won’t be able to pay me as much.”
“True,” I said, “But it’s not really the same. With the guaranteed income annuity, once you give them your money, it is gone. It’s in their bank, not yours. But they’ve given you a promise of income for life.”
“Is that like a pension plan?” She asked.
“Yep, it is.”
“OK, well I’ve heard about those annuities before. Some people hate them,” she said, asking really.
“They do. Frankly, I think they are oversold at times. They are not for everybody, maybe not for most bodies. But for some people who really need to squeeze as much juice out of their financial lemon as possible…”
“Like me?”
“Maybe,” I said. “But like anything else, you don’t want to put all your nest eggs in one basket. But it could have a place.”
“Well it does sound like something I should at least consider. Are these things new?” she asked.
“Nope.” I told her. “They’ve been around for about a hundred years. More actually. But they seem to do a pretty good job of hiding them…in plain sight.”
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