Do You Face 'Money Death' in Old Age?

Consider these investment and spending issues to make sure you don’t outlive your assets.

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"Money death" is a dramatic term used in a contrarian study about strategies that help people avoid outliving their assets. Brandes Investment Partners, a money-management company based in San Diego, notes in "Boomers Behaving Badly" that running out of money is a top concern of retirees. With safe investments paying historically low interest rates and a still-shaky economic recovery, retirement security concerns are getting worse these days, not better.

[See 10 Steps to Fine-Tune Your Retirement Plan.]

Yet for many investors approaching their retirement years, Brandes lays out a more optimistic path that relies on moving away from conventional retirement strategies in favor of a more aggressive approach. The Brandes retirement portfolio is heavily weighted in dividend-paying stocks and higher-yield corporate bonds, even for investors well past retirement age.

In most simulations, such holdings return significantly more money than a traditional portfolio containing lower-return bonds and other "safe" holdings. And the odds of such a portfolio running out of funds remain very low. To compensate for the added risks of that more aggressive strategy, Brandes further advocates that people buy longevity insurance, setting aside the purchase funds right now for an annuity that doesn't begin making payments until they turn 85.

Such annuities were endorsed last week in a set of retirement-plan rule changes announced by the U.S. Treasury, and supported by a research report from the Obama administration's Council of Economic Advisers.

"I think the immediate impact [of the rule changes] is that insurance companies will be much more aggressive in marketing annuities to the retirement sector," says Barry Gillman, research director of the Brandes Institute Advisory Board, which issued the study. "Longer term, I think it could be a very big influence in allowing people to take back control of their own retirement."

Gillman stressed that Brandes does not recommend longevity annuities for everyone. They make the most sense for healthy people who expect to live into their late 80s or 90s. Also, they make the most sense for relatively affluent people who could spend $100,000 or more right now on a longevity annuity without making a big dent in their retirement nest egg.

[See 6 Tips for Evaluating Longevity Insurance.]

Most importantly, the purchase of such an annuity must be linked with the higher-return investment strategy. Of the two-pronged approach, Gillman says, a higher-return portfolio for retirees is the bigger behavioral shift.

Citing investment and behavioral research, the study said that 60 percent of a person's investment income during their retirement years is earned after they retire. Adopting a conservative investment strategy during those years, it said, is not the best way to produce more income. Yet people's fear of losing money is so strong these days that they favor a defensive investment posture which Brandes feels is not in their best long-term interest.

Brandes' study evaluated a sample portfolio made up of 80 percent dividend-paying stocks and 20 percent higher-yield bonds. The test portfolio was diversified across global markets and included different asset classes. Also, Brandes stressed, the portfolio must be regularly rebalanced to maintain the appropriate investment mix.

In contrast, Gillman says, "we have the whole [retirement] industry that is focused on the conventional approach, with target-date funds and glide paths [shifting stock-bond allocations] that move into more conservative holdings."

Before the advent of longevity annuities, he says, there was no easily available downside protection to encourage investors to move away from such a defensive investment position. Such annuities have only been around for a few years, and are not widely sold or heavily marketed.

In its purest form, Gillman says, a person would buy a longevity annuity at the age of 60 or 65. Because the odds of surviving to 85 are only about 50-50 for people turning 65, insurers are willing to provide attractive payouts. Someone paying $100,000 for such an annuity could expect annual income payments of about $75,000 when they turn 85, Gillman says. If they live into their late 80s and, especially, into their 90s, the product produces increasingly attractive returns, even allowing for the impact of inflation.

[See 8 Steps for Building Solid Estate Plans.]

One concern annuity investors have, of course, is getting nothing for their $100,000. If they die before payments begin, the insurance company keeps their money. For this reason, Brandes feels the longevity annuity is best viewed not as a standalone decision, but as part of a comprehensive retirement investment strategy.

In nearly all cases, the investment portfolio Brandes recommends would outperform conventional portfolios by much more than the price of the annuity. If the retiree dies before collecting the annuity payments, the odds strongly favor his or her estate still being better off.

People considering Brandes's advice need to answer six core questions to help them decide:

1. How long will you live? There are many online life expectancy calculators that use a person's current health and family health history to estimate their remaining years.

2. What is your money-life ratio? This ratio, Brandes said, takes your financial assets and divides them by the difference between your planned spending and other income (from work, pensions, and Social Security) during the first year of retirement. If the ratio is large, your odds of "money death" are small and you don't need a longevity annuity. If the ratio is small, you probably don't have enough money to buy the annuity and, unless you sharply cut your retirement spending, will almost certainly encounter money death. People with ratios between 18 and 30 should consider Brandes's ideas about how to outlive their assets, the study said.

3. Can you adjust your retirement date and your retirement spending levels to significantly improve your money-life ratio?

4. How much longevity income would 10 percent of your wealth buy, and is this enough to implement Brandes's strategy?

5. Do you have the fortitude and discipline to pursue a higher-return retirement investment strategy, especially through a declining market cycle?

6. Do you have estate considerations that argue against the Brandes strategy in favor of preserving principal at all costs?

Twitter: @PhilMoeller