Die Broke

4 Feb

How Do I Organize My Money to Spend My Last Dollar the Day I Die? asked the investor
And the advisor said, “That’s no problem, Sir. What day will that be?”

Not knowing when we’ll die means making sure we arrange our finances to produce income for as long as we live. Aside from being able to live off just the earnings of our investments, only social security, pensions and annuities can pay you a lifetime income.  We would all like to have jut enough money to last until our last day and die broke.  While that seems like a wild idea, it’s doable.

Social Security gives you a lifetime income because the government can compel taxpayers to pay for it. And, if things get tight, they can print the money necessary to pay you.  And it stops the day you die.  If you do get a pension, it’s likely being paid by an insurance company in the form of an annuity.  As long as the insurance company remains solvent (large companies such as Prudential and New York LIfe lent money to the federal government during the Depression), you receive income for life that stops the day you die. If you like that idea, making optimal use of your money while your alive and then dying broke, you can also create your own private pension.

Insurance companies – generally being more fiscally responsible than the government – use the voluntary premiums of thousands of annuity holders, the premium earnings, and the statistics of mortality to assure everyone a lifetime income. Using an annuity has some other advantages for you, too. Let’s look at a few.

The application advantage

Unlike life insurance, you generally don’t need a health exam to buy an annuity. Life expectancy for annuity payout purposes is determined by insurance company experience and not as a result of a physical examination.

The later payout advantage

Because of the nature of mortality rates, beginning your annuity payouts later mean your monthly payout increases for the same investment amount. So, the longer you can hold off receiving payments, means you need less investment money to achieve the same monthly payout.  If you have a joint and survivor annuity, two lives are used in the calculation and the amount of the payout is smaller than with a single life contract.

The tax advantage

During the accumulation phase of a deferred annuity, your investment grows faster because its earnings are tax-deferred. You pay income tax only during your annuitization (payout) phase – and then only on what hasn’t been taxed.

If you purchased an immediate annuity – payouts start in about a month – with after tax money, only the earnings of your premium during the payout phase is taxed. This is a relative small fraction of each payout. If you’re able to outlive the mortality projection, you’ll receive a lot more money over and above your single premium payment.

If you purchase an annuity within your IRA, your payments must meet the Minimum Required Distribution (MRD) rules after you turn 70½. All of each payment is taxable income. The IRS has life expectancy- based table for determining the MRD amount. But with people living longer, this table is becoming dated. So the IRS will accept[1] a ‘lower’ MRD based on the insurance companies longer remaining life expectancy.

To see if you can die broke and enjoy every last dime while your kicking, consult the immediate annuity calculator.

Note: Annuities once annuitized cannot be surrendered for value.  Income from deferred annuities is taxed as ordinary income and withdrawals prior to age 59 ½ are subject to a 10% penalty.  Income from annuitization is taxed part as ordinary income and part as return of capital. Any guarantees are based on the claims paying ability of the insurance company. Annuities should be considered long term investments. Annuities are insurance products and subject to insurance related fees and expenses.

[1] www.irs.gov/publications/p590/ch01.html#d0e1252, Special rules apply if you receive distributions from your traditional IRA as an annuity purchased from an insurance company. See Regulations sections 1.401(a)(9)-6 and 54.4974-2. These regulations can be found in many libraries and IRS offices.

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