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Monday, 01 September 2008 00:00
Smoothing The Retirement Road
By Ron Dorner
Wow! How things change. If you are at, near, or in retirement, you face some of the greatest challenges of your life. As the world rushes toward God’s judgment, we are seeing very uncertain economic times ahead. That raises some questions:
The “gift annuity” is a tool that can help. It enables a person to invest a portion of his or her assets to provide an income stream for as long as the individual lives. At the individual’s death, any remaining sum could go to support selected charities. Grace Village, Grace College, and Grace Brethren International Missions, as well as other charitable organizations, offer gift annuities. Once funds are invested in a gift annuity, the individual does not have access to the funds except as an income stream. Money that is needed for living expenses should not be put into a gift annuity. This negative can be turned into a positive by correctly using annuities.
Imagine a couple who have just turned 65 and started drawing Social Security income. They have been frugal and have retirement assets of $250,000. Right now they think they can get a return of seven percent on their money over a period of years. But, they also have a nagging fear that the economy may not support that level of return over time. They also realize that as they age, they will not want to be as actively involved in managing their investments. This raises the concern of picking a trustworthy counselor. They both are in good health and wonder how long they will live. Will they have enough money if they should both live to be 95 for example?
Good questions. Unfortunately, many retirees never seriously address these issues. I want to present a sample illustration for this couple. In the illustration all annuities will be Two Life Annuities. That means the money will be paid out yearly in the same amount as long as either one is alive.
At age 65, the couple invests their entire $250,000 nest egg and plans to earn a yield of seven percent, or $17,500 per year. At age 75, they decide to purchase a Two Life Annuity with $125,000 of their original nest egg. This annuity will pay six percent as long as either of them is alive. At that point they have $7,500 per year from the annuity, and if the remaining $125,000 principal can continue earning seven percent they will have a total of $16,250 per year. At age 85, they purchase another Two Life Annuity for $70,000 of their original nest egg leaving $55,000 invested at seven percent. This $55,000 still can be used for emergencies. The new annuity will pay out 7.4 percent for life ($5,180 per year). They now have $12,680 per year income from annuities and if the $55,000 continues to earn 7 percent their total income will be $16,530 per year.
Let’s step back and look at this hypothetical situation. Income stays fairly constant throughout life ($17,500, $16,250, $16,530) Even if the remaining spouse lives to be 110 years of age the income stream continues!
If the Lord should call them home at age 86 the charities they have selected will benefit nicely.
If at age 86 they can no longer manage their investments and lose the amounts outside of the annuity they will still have an income stream for life of $12,680 per year.
Each person’s situation is different but you can see by this illustration that a planned approach to longevity and securing your future is worth considering.
If you are blessed at retirement with assets that have greatly appreciated and if you have a desire to use them to create an income stream while greatly reducing the impact of capital gains taxes, please do not sell them without first consulting a good trust attorney. He or she will be glad to introduce you to the Charitable Remainder Trust.
Ron Dorner is director of Biblical Money Management. BMM has been helping believers handle their finances and estate planning since 1984. Online counseling is available at www.BiblicalMoneyManagement.com.
Published in September/October 2008