A couple of reader feed-back items deserving attention have been squirming around in the “To Do” file and in my mind. Now’s my chance to share them with you. And, because they’re about totally different universes of wisdom, I can’t believe how, in the end, I manage to link them together.
Reader R, thinking about the recent segment about annuities, asks “How can an annuity generate so much income?” Glad you asked, R. Space limits prevented fleshing this point out in full.
First, we have to be careful about terminology. “Cash flow” is not the same as “income”. In an annuity, especially one beginning at an advanced age, only a small part of each payment that you receive is “income”, earnings on the remaining amount of your contribution, the money that you paid in, and therefore, taxable. The rest is “return of principal”, part of your contribution to the annuity. Regardless, you get to spend all of it, as though it were all income. It is cash, arriving in your mailbox or checking account each month.
What happens when all of those increments reach the point where there’s no principal left? Here’s the heart of the annuity idea: The full cash flow payment keeps on coming, uninterrupted and in the full monthly fixed amount, (or variable fluctuating amount if it’s a variable pay-out annuity ) for as long as you live.
You have transferred your risk of outliving your resources to the insurance company, and it guarantees that you will continue to receive payments for life. It’s like your pension plan and your Social Security; they are annuities, too, also buttressed with the same sort of risk-pooling scientific actuarially calculated reserves that your annuity’s insurance company maintains.
But, what happens if you die before getting all of your money back? Pensions and Social Security guarantee old-age survivor benefits to surviving spouses for as long as they live after you die. Your personal annuity does better than that: When you enter into the contract, you have many choices of various survivor benefits, and they’re paid to anyone whom you designate, or to a succession of beneficiaries, so that the full survivor benefit that you elected continues, and will be received.
But one of the survivor options is a lifetime survivor income benefit to a beneficiary, even if he or she outlives the fund, the same guarantee that you, the annuitant, enjoy and can rely on. And if that beneficiary doesn’t outlive the fund, the balance goes to the next beneficiary in line.
Of course, when we and our beneficiaries outlive the mortality tables -- My Mom went to 101, one of my OLLI students is 92, and my professional mentor almost reached 103 -- the cash flow after the “return of principal” is complete is all income, and is taxable as “ordinary income”.
Settlement options abound: To synch and coordinate with your other financial dynamics and their cash flow characteristics, instead of lifetime benefits, you can elect various fixed-period or fixed-amount options, lasting until the principal and its earnings are exhausted. And you can defer the commencement dates.
How are benefit amounts calculated? The factors are the annuitant’s and the beneficiaries’ ages and genders, the minimum guaranteed earnings rate offered at the beginning of the contract, the actual earnings rates that the insurer achieves for you, the variations if you choose a variable annuity, the benefits commencement date, state-mandated consumer protection laws and regulations, the optional “opt-out” privileges that you select, your selection among the many survivorship options, and your selection of the insurance company.
Four undisputable eternal truths:
1. Old-line very large, nationally-operating, long-term financially rock-solid life insurance companies that emphasize annuity business and don’t dazzle you with flashy-long-run-risky contract features are best.
2. Couple that with a truly credentialed, experienced, professional counselor-agent for guidance through the many late-life and estate planning decision points and strategies that you should consider.
3. Yes, this is a core element in the management of the “you enterprise”, very serious. And there’s no room for mistakes or lousy judgment, right?
4. Annuities are unexcelled ways to maximize our cash flow for living expenses, and we can rely on them. They’re not intended to provide liquid capital, speculative growth and opportunity profit, “playing the market”, or transactional marketability. When used for the wrong purposes, their loudmouthed critics then -- and only then -- are right.
OK, reader R?
Another reader R, totally in a different world over seven thousand miles from the above reader R, contributes the following whimsical muse. Besides being fun, it seems to capture some real wisdom for us seniors. Thanks, other R:
“I am a Seenager. (Senior teenager):
I have everything that I wanted as a teenager, only 60, 70 or 80 years later.
I don’t have to go to school or work.
I get an allowance every month.
I have my own pad.
I don’t have a curfew.
I have a driver’s license and my own car.
I have ID that gets me into bars and the wine store. I like the wine
The people I hang around with are not scared of getting pregnant, they aren’t scared of anything, they have been blessed to live this long, why be scared?
And I don’t have acne.
Life is good!
Also, you will feel much more intelligent after reading this, if you are a Seenager: Brains of older people are slow because they know so much. People do not decline mentally with age, it just takes them longer to recall facts because they have more information in their brains.
Scientists believe this also makes you hard of hearing, as it puts pressure on your inner ear.
Much like a computer struggles as the hard drive gets full, so too, do humans take longer to access information when their brains are full.
Researchers say this slowing-down process is not the same as cognitive decline. The human brain works slower in old age, said Dr. Michael Ramscar, but only because we have stored more information over time. The brains of older people do not get weak. On the contrary, they simply know more.
Also, older people often go to another room to get something and when they get there, they stand there wondering what they came for. It is NOT a memory problem, it is nature’s way of making older people do more exercise.
I have more friends I should send this to, but right now I can’t remember their names. So, please forward this to your friends; they may be my friends, too.
Ooops, time for a nap...”
All of this almost makes me wish I were still practicing life underwriting. I could market some of the companies’ products as “seenagers’ annuities”. Can’t wait to see your quips about that!
Contact Gary Newman at email@example.com. Your ideas and comments are always welcome.