“Mortality Credits” Have a Place in Retirement Planning

If a 65-year-old wanted to have income for the rest of his life, he would have to be able to look into a crystal ball and know how long he will live.  Obviously, if he lives another 18 years, he will need a lot more than if he only lives five more years.  Think of how stupid it is to reach retirement age and hope you die soon!

If this 65-year-old could find nine more men his age and they all agreed to “pool” their money into one pot, withdrawing equal amounts of income, the amount of money needed to live on through retirement would be half of the amount needed if he went it alone. How is this possible? Let’s follow the math and find out:  If they all put in $125,000 and pay it out equally according to mortality rates, some men will die early and forfeit their deposit.  However, the ones fortunate to live much longer will get extra money credited to them far beyond their deposit.  This is called a “mortality credit.”

To make this example simple, I am only focusing on one thing:  the credit amount one would receive if they lived longer than others in the pool… I am not worrying about the rate of return or the safety of where this money is being invested. So how can a person “pool” their money with others? Simple, insurance companies can hold deposits and pay them out equally and they can keep deposits invested in a safe place.

So here is the trick for a little higher retirement income:  Purchase an annuity and wait until you are older to1142 turn on the income feature.  

Here’s how it works:

  • $100,000 for an age 65 male will pay out about $5,000 annually for life.
  • At age 70 the payout is about $5,500 annually.
  • At 75 it’s about $6,000.
  • At 80 it’s about $6,500 each year.

I am using very round numbers, but if you waited to purchase an annuity until a little later in life, the payouts will be higher not just because the money has a chance to grow, but because you are older and there will be a shorter time to pay out the money, thus you get much more.

To summarize:

  • A 65-year-old male places $100,000 into an annuity,
  • He allows it to grow until turning on the income stream at age 75, making his payout about $12,000 (assuming the money doubled in value).

Don’t get hung up on the numbers as much as the principle idea here; I have used these numbers simply as an example of how annuities can work. You can increase retirement income by looking into an annuity. Of course waiting 10 years to take the income from that annuity increases the payout and that naturally comes from the earned interest. But a major portion of the increase also comes from “mortality credits.”

To learn more about this type of retirement planning and other strategies that you may not be aware of, contact me: peter@moneymastery.com or (801) 292-1099, ext. 2.