Part I: Income
Preservation vs Wealth Preservation
aka Puttin’ It In
& Takin’ It Out
Despite
perfunctory winks and nods, all (99.99%) of personal financial planning is
about ‘more.’ By external relative comparison more validates worthiness – yes,
one’s worthiness in this model/heuristic. Thus, the change and acceptance
thereof of income preservation as the primary objective – especially at the
dilution & consumption of ‘net worth’ - instead of wealth preservation is a
tough transition for most (as well as so called personal financial on a
percentage of assets under management compensation mode the higher the assets under management the
greater the planner’s compensation; the lowering of assets under management
reduces the asset under
management compensation of the planner).
So,
the transition and realignment of resources for income preservation usually
comes at the expense of more, more, more while explicitly and or implicitly
induces the feeling expressed or unexpressed irrationally of being less - given the ‘lessening’ of net worth and the
hardwiring and acceptance of the ‘more’ heuristic.
A
case in point: annuitization.
To
annuitize is to convert a sum of money
(from capital that has been accumulated) into a series of payments. For example,
an investor may
pay a sum of money in return for payments of a fixed or inflation adjusted amount
for a fixed period of time or a lifetime of monthly payments. However, once the annuitant
or annuitants (in the case of a joint and survivor annuity) die unless there is
a period certain of annuity payments regardless of annuitants living – the
annuitant and any residual accumulation is forfeited to the insuring insurer.
That’s
right that $50,000, $100,000, $1,000,000 plus is gone once you are gone except
in the cases stipulated above (which lowers the annuity payment during life.)
People
hate insurer issued annuities (and well they should –which are a rip off with
2-3% going to fees annually – and variable annuities are worse).
But
the concept of annuitization in personal financial planning relative to enough
for income preservation is ‘worth’while.
One
can do their own ‘annuitization,’ however, as some self serving brokers will
state accurately but incorrectly (as a lawyer friend of mine use to say), you
still have the risk of mortality and outliving your own annuity.
As
far as mortality risk (some annuities pay up at death – not usual but some for
a price do) better to have your own much much cheaper life insurance (assuming
insurability (1)) than the cost of mortality insurance inside the annuity.
Relative
to ‘outliving’ the self funded annuity – that is a question of planning and
one’s tolerance for risk relative to the goal. After all, even with state’s limited annuity pool guarantees,
insurance companies regardless of AAA+ ratings go down or are merged out to
hide that they are going down – delaying annuity payments (remember Mutual
Benefit Life’s AAA+ rating as well as New England Life and Confederation Life –
Mr. Broker?).
Annuities
are really just a wrapper around bonds and income investments though variable
annuities have equities inside as well. The only distinction is that – and
assuming the insurer doesn’t go down – that the payments will continue – you
can’t outlive them for which you pay a heck of a premium – commission (on the
purchase or in surrender) and 2-3% every year.
Thus,
an alternative privately created ‘variable annuity’ is buying Berkshire
Hathaway B and say a balanced or income
oriented mutual fund like Vanguard Wellsley in equal portions over a 3 or 5
year period to minimize ‘interest rate risk’ along with a term life insurance
policy to cover ‘mortality risk.’ After all, what do you think the insurers are
buying for an immediate fixed annuity or a variable annuity?
So,
annuities suggested by a planner (there are exceptions) is buy and large an
indication of a lazy ‘so called’ planner.
Still,
the overarching problem is the fear of outliving one’s money and therefore irrationally
choosing wealth conservation at the expense ironically of the income
preservation for not outliving one’s resources!
Income
preservation methods (many) aka ‘putting it in and taking it out” (not code for
personal financial pornography) will be the subject of the next post.
(1) What most insurers don’t tell
those with higher mortality risk (and most planners don’t know) is that there
are impaired risk annuities which have higher payouts based to the fact those
impaired risk potential annuitants will have shorter longevity and thus the
payout period would be less than normal
