So Will You Outlive Your Money?

Timothy Taylor at Conversable Economist has an interesting post on the Life Expectancy and Annuities. I have been meaning to do more work/publish on this subject as it is both very important and quite underappreciated by many during a period in their life when they can do something about it.

Taylor cites a survey done in 1992, which shows that many Americans underestimate how long they will live. He then builds a case that annuities could help.

Annuities are the straightforward financial tool that provides insurance against running out of money before the end of life: basically, you pay for the annuity up front, and then the company guarantees you a stream of payments for the rest of your life.

Off course there are many reasons why people do not like annuities. One of the reasons that Taylor mentions is the fear of death sooner than expected and then ‘losing’ out on the annuity. I think that the only time this will be a loss is if one was planning to leave the money used up for annuity to survivors. Obviously, one can leave for survivors only the left-over money so this alternative runs against the danger of ‘outliving one’s money’.

Another reason is that once people commit the money upfront for annuity then they will lose the flexibility of dipping into it in case of emergencies. But as Taylor writes:

The potential benefit of longevity annuities is that they are truly insurance against outliving your assets, by offering a relatively large payoff if you live to a longer age than you expect.

Annuities may turn out to be one of those products that people don’t like to buy, but after they have taken the plunge, they are glad that they brought.

Anyway you cut it the bottom line is that one needs to address the danger of ‘outliving one’s savings’. One way to do it is to buy annuities managed by outside firms. Another is to manage your retirement savings in a manner that it generates an income stream that will outlive you.

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