Question:
In two years I will be 65, and I want to retire. Sometime in the next 10 years, I will inherit around $500,000, but until then, I have between $60,000 and $70,000. I will need $500 from my nest egg to live as I would like. Do I just spend down? Is there a way to not spend down and still get $500 a month? A financial adviser suggested I spend down for five years, and set up an annuity now, that would go into effect at age 70. The annuity will pay me only $200 a month for life; however, I might inherit the money by 70.
Answer:
We see similar situations with many clients. The main point we try to convey is that there are a lot of unknowns in the next 10 years. How certain are you about the inheritance? This is a considerable amount of money compared to what you currently have. While this information is brief, it is a concern to us that you are willing to choose to retire solely banking on the fact you will inherit this money.
Your safest option is to spend down. Drawing $500 a month for 10 years will consume your current savings of $60,000 to $70,000. If the cost of living increases, you may find yourself needing $550 a month to maintain your lifestyle. Unfortunately, there is no magic investment that will grow your assets in line with any inflation the economy might experience.
Additionally, you do not mention if you have any emergency reserves. If you were to fall ill, or require long-term care or an assisted living facility in later years, you could likely spend your entire savings before receiving your inheritance.
Many investors use annuities as a way to manage the risk of outliving their assets. Annuities allow for tax-deferred growth on assets as well as an insurance element. A fixed annuity guarantees fixed or pre-determined payments for a specific period, or for life, beginning at some future time. The insurer takes on the investment risk that the earnings in the annuity will not be enough to provide for the predetermined payout, and the risk that the annuitant will live longer than expected and payments need to continue even when the money in the account has been depleted.
We would not suggest an annuity in your situation, because the annuity you are considering pays only $200 a month, which is less than you want to draw. Annuities also come with many fees and expenses that can take away from your total return. For example, many annuities have substantial early surrender charges that can make it costly to draw out principal early if needed.
With interest rates as low as they currently are, we would suggest laddering out your savings in short-term CDs. One-year CDs yield about 0.5%, and you may be able to get around 2% for a five-year CD. We would not go any farther out than five years.
Disclosures
This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
