Making retirement money last to 103: an expert's plan for himself

The balancing act

Lots of people like the idea of guaranteed income in retirement, in theory. But who wants to lock up the bulk of their money? "For me, the real, visceral experience was about how much money I was willing to part with," Littell said. "It was more about a percentage — 15 percent to 20 percent of assets — than trying to get a specific income."

He definitely does eventually want to create a greater stream of income, but wants to buy it over a period of years. He can eliminate some of the risk of being heavily in equities as he nears retirement by locking in some income now — but doing it gradually means he won't have locked up his assets and be in a bind if a big health or other issue comes up.

Traditionally, investors nearing retirement with a lot of money in equities would move money into bonds. But low interest rates, which can make buying a future stream of income in an annuity expensive, and the fact that we're living longer is changing that calculus.

Littell wants the certainty of a floor of guaranteed income from annuities, and he's particularly concerned about longevity, which bonds don't really protect against. Another reason he's not choosing bonds is that when you self-insure, "the uncertainties of the market mean you have to be very conservative in taking withdrawals," he said, "and you have to avoid making big mistakes when the market is down." 

The simpler products

The simplest annuity Littell and his husband own is a deferred income annuity on Edward's life. They paid $60,000 for it when Littell started focusing on retirement planning late last year, and it will start paying a little more than $500 a month when Edward turns 74, and keep paying as long as he lives. They chose an annuity that doesn't provide a benefit after Edward's death because it provides the largest lifetime income payout. 

Another somewhat serendipitous element of his plan comes thanks to a low-cost variable annuity. He bought it long ago with money from a small inheritance, less because he wanted guaranteed income than to defer taxes on the account's growth. The account balance is invested in low-cost stock mutual funds.

Littell originally figured he'd cash out the old product and buy a deferred income annuity. But the variable annuity uses older mortality tables and has guaranteed interest rates built into it that you can't get today — its payout of 7.5 percent for a 65-year-old man made it a far better deal than he could find elsewhere. (If the amount you put in is $100,000 and the payout is 7.5 percent, you get $7,500 a year.) 

"If you have an older life insurance or annuity product, you might have something of tremendous value, so hang on to it," he said. 

The not-so-simple product

Then there's Littell's most complex product, an indexed annuity with an income rider. The account balance is indexed to the stock market. It will never appreciate as much as the market, but the account balance will never drop below zero.

The income rider promises a minimum monthly payout when turned on, depending on the buyer's age. The guaranteed minimum income payment is comparable to that of a deferred income annuity, Littell said. But the income payments could be higher, since there's exposure to equities. He also likes that he has flexibility in deciding when to start receiving income.

Unlike a regular income annuity, with this one you still own the account balance even after you turn on the rider. So at your death there may be money left for a beneficiary. If you live a long time, the balance could go to zero, since each payment reduces the account. The rider ensures that the income stream will continue even if the account balance is zero. Littell pays about 1 percent of the balance, annually, in fees.

Littell will invest more in annuities over time. "The older you are, the cheaper it is to buy income, for the lovely reason that the payout period is shorter for the insurance company," he said. He'll get more income when he takes his $1,000-a-month pension (the frozen one) as an annuity. "If you have a defined benefit plan that promises an annuity payout, you'll probably get a better rate with that than if you took a lump sum and bought an annuity from a commercial provider," he said. 

Littell and his partner own their home free and clear. At 62, he plans to open up a reverse mortgage letter of credit. That allows him to lock in the ability to borrow against their home. If the stock market goes down, it can be a good way to supplement income without having to sell investments in a down market, or having to take money out of a retirement account early and pay taxes and penalties on it.

The bottom line

"We're all products of our environment, and having a 103-year-old father affects how I think about planning," Littell said. "I want to be really, really, really ready." He is "acutely aware that the costs ofretirement are tremendously uncertain, and you can be ready for the average costs — or be really ready for whatever happens." 

He views his plan as conservative in some ways and aggressive in others — aggressive, for example, in how he keeps a significant exposure to equities as he ages. "With the annuities and the long-term care insurance, I can afford to take more risk with my investment portfolio," he said.

If something goes wrong in retirement, his flexibility means he has options, Littell said. And if things go well? "I look forward to writing bigger checks to my favorite charities each year." 

Annuities are hard products to understand, so it's not a bad idea with complex products like these to show them to your attorney, if you have one. That way, you can make sure you understand the terms and that the product works like you think it will.  To contact the author on this story: Suzanne Woolley at [email protected] To contact the editor on this story: Peter Jeffrey at [email protected]