The Real Reason You’re Always Broke

Steve McDonald By Steve McDonald, Bond Strategist, The Oxford Club

Two-Minute Retirement Solution

One hundred thousand dollars in an annuity today will buy you about $5,700 per year in income.

If you have $1 million to give away to some insurance guy, you can earn about 10 times that, or $57,000. Easy math!

That’s not a lot of income for a $1 million investment.

Consider this… 25 years ago, that same $1 million paid an annual return of $116,000. So right now, that $57,000 really looks like chump change.

The amount of money you can earn from an annuity or interest-bearing account is a function of interest rates… and they have been in the toilet for almost 10 years.

And if the results of the recent Fed actions are any indication, they aren’t going anywhere anytime soon.

The only thing more unsettling than a 50% drop in income is that, according to a measure called the “Annuity Factor,” our cost of living has doubled during the same period!

Now you know why it seems like you’re always broke!

But this isn’t about just interest rates.

The Annuity Factor is a function of both interest rates and longevity. And as we’re well aware, the longevity bonus medical science has handed us is allowing us to live years longer than we ever thought possible.


So we have a double whammy… low interest rates and growing life expectancies. But we still have to pay for our remaining time here on Earth.

Add to the mix the fact that we have the highest Annuity Factor ever recorded. And there doesn’t appear to be any relief on the horizon from the traditional sources: CDs, savings and annuities.

Those of us living on a fixed income are in a real pickle. And there aren’t any magic fixes. Most of the remedies for this mess are ones you’ve heard of before…

Don’t file for your Social Security until age 70. In most cases, you can realize as much as a 40% increase in your monthly benefits over your FRA (forward rate agreement) payout.

Save as much as you can. Just funding your 401(k) and IRA won’t be enough.

Pay off all the debt you can before you retire. For many, too much debt is the final nail in their coffin.

Work as long as you can. Explore part-time work in retirement to supplement your income.

And – the tough one for most of us – get on a budget and stay there. Too many folks have been on spending binges for decades. And most of us won’t survive in retirement if we try to maintain the lifestyles we had when we were working.

Oh, and stay healthy. Most of the big expenses in later retirement are medical bills. Watch your weight, exercise and get regular checkups. They become more important as we age.

I wish it were better news, but making a few changes in our saving habits will make all the difference between a miserable life and a comfortable existence during our golden years.

Good investing,

Steve

P.S. Annuities can be controversial. In fact, Marc Lichtenfeld and I discussed the benefits and drawbacks in our “What Price Would You Pay for Guaranteed Income?” debate. It’s a “must watch,” regardless of whether you’ve considered or dismissed supplementing your retirement nest egg with an annuity.