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The Retirement Dilemma --"Tall" or "Long" Money?

By Dr. Shelby Smith
of The Retirement Pros

Most of us measure our retirementmoney by how “tall” it is rather than how “long” it is. It’s not how much money you’ve got that’s important, but how long it will last. Because of uncertainties like inflation, taxes, investment losses, emergencies and more, retirees don’t know how long they might live; thus, it is hard to determine how long the “tall money” will last. This is why retirees’ greatest fear is outliving their money, referred to as “longevity risk”. If the “tall money” is laid down over the retirement years it becomes “long money” and longevity risk can be managed. How can this be done?

Insurance companies manage all types of risk by spreading it among many individuals to make the probability of loss predictable. For example, historical records yield the probability of fire occurring in your home and how sprinkler systems, proximity to fire stations and structure type can lower the risk. Insurance premiums are based on these data which make coverage affordable for you and profitable for the insurance company. Everyone pays premiums but only a few file claims for damages; thus, the lucky ones subsidize the unlucky one. Longevity risk is handled the same.

By insuring the longevity risk of many retirees, insurance companies can offer affordable coverage, because those who die too soon (the unlucky) subsidize those that live too long (the lucky). Longevity insurance comes in the form of a Guaranteed Lifetime Income Benefit contained in an annuity. Here’s the way it works: You use your “tall money” to purchase an annuity that pays a competitive rate of interest plus allows you to turn it into “long money” at any time without penalty. The guaranteed lifetime income for the rest of your life means your money will last as long as you do. There are safeguards that keep you from losing money if you die too soon, but never can you run out of money if you live too long. What’s more, you don’t have to turn all your “tall money” into “long money” – just enough, when combined with Social Security and your other lifetime income, to assure you an adequate income regardless of how long you live.

There are other benefits like inflation protection and spousal coverage that can be added to annuities, but each will raise the amount of money needed to get a given income. You can change your mind and withdraw your money lump-sum from the annuity both before and after your lifetime income starts; however, there might be penalties for doing so. Your lifetime income is safe, because it is guaranteed by an insurance company – the same ones that insure your home, car, health, life and business. What’s more, many insurance companies are giant corporations that have been in business for hundreds of years and weathered depressions, wars, failure of governments and financial meltdowns. Your money is safe.

If you want to turn your “tall money” into “long money”, take the time to learn more about the guaranteed lifetime income benefits of annuities. A great place to start is your financial advisor – he or she can help you select the best annuity and needed features to meet your needs, and then shop the market to get you the highest lifetime income. Living too long is a risk just like home fires, auto wrecks, medical problems and other risks that we pay an insurance company to manage for us – so why not longevity risk?


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