Uncle Sam's Annuity

A risk we all face is longevity risk - outliving our money in retirement. We want to protect our income against living to our maximum age - say 100. Why should we plan on living so long? Most likely it won't happen; but it might, and if it does, we might appreciate an insurance policy that pays more the longer we live.

This insurance policy is called an Annuity. For a lump sum, you receive a monthly payment for as long as you live. Annuities are not popular. There's a commission to pay and lots of fine print. There is also the possibility of the insurance company going bust, and you losing your money.

Well, I am going to tell you of a fully inflation-indexed policy from the most reliable of insurers. One who charges very inexpensive premiums, doesn't take a commission, and without pages of unintelligible fine print. His name is Uncle Sam and the policy is called 'Social Security'.

If you started taking Social Security retirement benefits under the age of 70, you have the option of paying back the money you received and taking a higher benefit. You would be paying a lump sum (the repayment amount) for an inflation-adjusted life annuity (the increase in monthly benefit) with a higher rate of return than you will find in the private insurance marketplace. Let's look at an example:

You started taking a $1,000 per month retirement benefit at age 62 and are now age 70. You have received a total of $96,000 in payments (ignoring inflation to keep things simple). If you had delayed taking the benefit until age 70, you would be receiving $1,670 per month in income, an extra $670/month. If you repay the $96,000, you can reapply and receive the $1,670 per month. In effect, for $96,000 you have bought an inflation-indexed annuity that pays you $670 per month for life. This represents a 8.4% payout rate on your investment.

Vanguard offers life annuities with inflation protection. A 70 year old man would be charged $115,875 for an income of $670 per month, and a 70 year old woman $129,623. Doesn't the $96,000 look like a deal now? By repaying Social Security every dollar you received from them since the age of 62, you are buying an inflation adjusted annuity for a price that beats anything offered by the financial services industry. This works nicely for the millions of retirees in their 60's and 70's who opted, years ago, to take Social Security benefits at a relatively young age.

Before you consider purchasing an annuity, let us check if this strategy would work for you. Call 408-725-7135

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