A 2019 survey by AIG Life & Retirement revealed a surprising 53 percent of respondents had living to 100 as a goal. Today, more Americans than ever are reaching this goal. According to Wikipedia, there are nearly 1400 centenarians in the US alone—a number that has more than doubled in less than a decade. With continued medical breakthroughs, we expect this number to keep growing!
This may be good news for some, but for others, longevity presents financial challenges. According to Forbes.com, running out of money in the future is the #1 financial fear for Americans. As a matter of fact, most people are more afraid of running out of money than they are of dying!
Fortunately, it doesn’t have to be that way. With some proactive thinking and the right strategies, you can have confidence your money will last as long as you do. In this article, we’ll give you five strategies for greater cash flow and confidence as you age.
Managing “Longevity Risk”
Life itself is the blessing that comes before all other blessings. Yet in investment circles, “longevity risk” is discussed in the same breath as market risk, interest rate risk, or the threat of a bad economy. It’s a risk to be managed as if it’s a bad thing!
The typical financial strategies for longevity aren’t much fun. The fear of running out of money is real enough to inspire extreme frugality in some people. Some seniors focus on their “fixed income” and feel they must clip every coupon and bypass every splurge to make ends meet. However, there are much better strategies than just tightening your belt. Here are five to consider:
#1: Keep earning!
The biggest mistake we see retirees making is retiring too soon, while underestimating longevity and inflation. Just because a person can meet expenses with current cash flow now does not mean they can do the same 20 years from now. And it’s more difficult for a 85-year-old person to return to work than for a 65-year-old person to continue earning.
We are conditioned by society to expect retirement by a certain age, yet there’s nothing magical about age 65 (or any age). And there are many benefits to remaining active and productive. By continuing some form of work or business, seniors experience:
- More engagement with others
- Continued purpose and contribution
- Sharper minds from continued learning
- Increased cash flow
- The possibility of building savings and investments.
It’s time to redefine aging, as argued in a recent blog post. As modern science and human potential push the boundaries of what’s possible, we hope that retiring at 65 goes out of fashion. Instead, we have seen a trend towards early retirement with the FIRE movement—“Financial Independence, Retire Early.” But too often, early retirements can lead to the same frugality and scarcity thinking experienced by fixed-income seniors.
However, many FIRE advocates aren’t “retired” at all! They have simply left the corporate cubicle for a more flexible life that may include freelancing, entrepreneurship, seasonal or part-time work and other creative alternatives. Some downsize out of large homes, homeschool children, and/or make travel, blogging, or creating YouTube content a part of their lifestyle. If you don’t love your current job or career—these are good alternatives at any age! Your time is your most important asset, so finding a way to make money that also gives you satisfaction and joy is essential.
For many examples of people who have continued earning with purpose, you’ll want to read our book, Busting the Retirement Lies. Whether you are 50 or 70, you’ll find inspiration (and some revealing number crunching) that can show you a new path.
#2: Annuitize a life insurance policy or purchase an annuity.
An annuity pays you a fixed level of income for as long as you live, turning an existing whole life policy or lump sum into cash flow. We aren’t fans of MOST kinds of annuities, but a single premium immediate annuity is a wonderful vehicle for the right person. For a steady stream of income you can’t outlive—nothing beats an annuity!
The key to maximizing an annuity is to not purchase one too soon. The older you are, the more income it will provide, as annuity income is calculated according to age. Generally we say annuities are ideal for people in their 80’s, although you may choose one earlier or later for your particular situation.
The downside of an annuity is that you no longer have the lump sum. One attractive option can be annuitizing only part of a whole life policy, which allows a policy holder to have the best of all worlds: steady cash flow plus the legacy, liquidity and living benefits of a policy.
(Want an estimate on how much an annuity will pay you? Contact Partners for Prosperity and we can assist you in evaluating, choosing and obtaining an annuity.)
#3: Sell a life insurance policy.
While an annuity can turn a life insurance policy or a lump sum into cash flow, selling a life insurance policy can create a lump sum. This concept may seem strange to some, but actually, people have been buying and selling life insurance policies for more than a century. Much like the deed on a home, a permanent life insurance policy is an asset that can be bought and sold.
This strategy works well only if the policy holder—and the life insurance policy—meet certain criteria:
- Generally, you must be in your 80s or older, unless you are in very poor health.
- You must have a whole life or universal life policy (not term insurance).
- Your policy must be appealing to those who buy policies. Usually investors only want larger policies.
Of course, investors must believe the policy is a good investment, and the seller must receive more for the policy than their surrender or cash value.
#4: Invest in life settlements.
Want stock market gains without stock market risk and volatility? Then you owe it to yourself to explore life settlements.
Life settlements represent the secondary market for life insurance policies. Buying a life settlement fund is the flip side of selling a life insurance policy. They provide a “win-win” for both buyer and seller. The life settlement industry provides seniors who no longer want or need their life insurance policy a cash injection while giving investors an opportunity to earn a profit over the course of (about) 7 to 10 years.
Warren Buffett (through Berkshire Hathaway) and Bill Gates have been known to be bullish on life settlements, investing substantial amounts of capital in this asset class.
If you anticipate living at least 10 or 20 more years and desire asset growth without stock market volatility, life settlements are an excellent choice. Once only available to institutional investors, now individuals who are accredited investors can purchase life settlements as well. Benefits of a life settlement fund include:
- Safety and stability. Policies are backed by life insurance companies.
- No market risk. Life settlements are unaffected by the stock market, housing market, interest rates, and geo-political events.
- Portfolio diversification. Life settlements can balance a stock-heavy portfolio, or provide gains for someone who has savings but few investments.
- Attractive rates of return. While past performance is no guarantee of future gains, life settlements often provide annualized gains from the mid-single digits to low-double digits. Research from the University of Connecticut and the London Business School has confirmed this range.
A life settlement fund can be purchased outside or inside of a self-directed IRA, which we can assist with.
#5: Sequence assets wisely.
After retirement, people tend to spend down a little from every asset. However, this is not efficient! By sequencing which assets you spend down first, you can keep more of your dollars.
Spend down your taxable accounts first, then utilize annuities, life insurance dividends, Roth accounts and investment income from real estate investments or oil and gas partnerships later. This reduces the taxes you’ll pay, which can increase your monthly cash flow.
Another way to spend down assets with savvy sequencing may be to utilize the equity in your home. A reverse mortgage—while not the right fit for everyone—can allow some seniors to collect monthly checks or receive a lump sum, while remaining in their home. The strategy also eliminates a monthly mortgage payment, although homeowners will still be responsible for property taxes, insurance, and other costs.
The bottom line is this: There are many ways to ensure that you can live a prosperous life at any age, without the fear of running out of money. It’s worth exploring various strategies to see which are a fit for you.
How Can We Help?
Partners for Prosperity specializes in alternative strategies for life insurance and investments. If we can answer questions or assist you with implementing any of these strategies, don’t hesitate to contact us today.
—By Kim Butler and Kate Phillips