A recent client asked me to help him create a plan that would guarantee $70,000 of income for the rest of his life. If you have read my book, you know I believe we should diversify your time horizon as well as your investments. When we need immediate income, we always want to generate that income the safest way possible. We don't want to take on market risk and then see our income disrupted due to market fluctuations.
For the first 5 years of income, we typically either look at laddering treasury bonds, certificates of deposit (CDs) or using a single premium immediate annuity (SPIA).
This very low interest rate environment makes investing challenging. I used Google Advisor to find the best CD rates in the Country. Here are the CD rates available for creating the CD ladder, and the dollar amounts needed to fund each leg of the ladder.
1st Savings = 0.25% $70,000 Used for monthly income the 1st year
1 Year CD = 1% $68,750 We will use this money for income in year 2
2 Year CD = 1.2% $67,650 We will use this money for income in year 3
3 Year CD = 1.4% $66,250 We will use this money for income in year 4
4 Year CD = 1.6% $64,750 We will use this money for income in year 5
TOTAL REQUIRED: $337,400 would be needed to fund the CD ladder
So when using CDs, we need $337,400 to fund the ladder in order to generate $70,000 per year of income for the next 5 years.
Our other option would be to purchase a SPIA contract (Single Premium Immediate Annuity). If we were to give an insurance company $328,404, this would guarantee my client $70,000 per year income for the next 5 years.
In this scenario, we need $8,996 extra to fund the CD ladder compared to using the annuity. Keep in mind this is all qualified IRA money, so for you technical people out there, we don't benefit from the exclusion ratio.
Of course, advantages and disadvantages exist with everything. The annuity would free up $8,996 to be invested in other segments of the strategy, but if you choose the annuity, you don't have liquidity like you would have with the CDs.
If you were making this choice, which option would you choose? Laddering the CDs or purchasing a SPIA?
Keep in mind that inflation is real and needs to be accounted for. We would typically make adjustments for inflation in a plan like this at the end of the first 5 years.
The importance of having a plan
I heard a story about Albert Einstein recently. The story goes that Mr. Einstein, while brilliant in many ways, was sometimes a little absentminded. Apparently Mr. Einstein was on a train headed to a conference when the ticket agent came by and asked for his ticket. After searching for several minutes Mr. Einstein could not find his train ticket. The ticket agent, recognizing Mr. Einstein told him not to worry he knew who he was and left him be.
Several minutes later the ticket collector was walking by and saw Mr. Einstein still frantically searching for his ticket. The ticket agent told Mr. Einstein again not to worry about finding the ticket because he knew who he was. Mr. Einstein supposedely replied, "I know who I am, but I do not know where I am going."
I've found that many people know what investments they have, but often times have very little idea about where those investments are taking them. Be sure you have a plan for your retirement and you know where your savings and investments are taking you.
Several minutes later the ticket collector was walking by and saw Mr. Einstein still frantically searching for his ticket. The ticket agent told Mr. Einstein again not to worry about finding the ticket because he knew who he was. Mr. Einstein supposedely replied, "I know who I am, but I do not know where I am going."
I've found that many people know what investments they have, but often times have very little idea about where those investments are taking them. Be sure you have a plan for your retirement and you know where your savings and investments are taking you.
The car windows as a kid
I remember as a kid driving in my parents Buick. We had windows you had to manually operate.
As the car aged the windows got harder and harder to crank up and down. I remember at one point having to use both hands to crank on the handle just to get the window rolled up. I swear it was cranking on those windows that gave me the amazing biceps I have today (wink).
Today's car windows have these fancy little buttons you push and the windows just go up and down with ease. I have to say I think the new technology is much better. Now one obvious disadvantage to the new and improved windows is that my children will never develop the amazing upper body strength I have.
But it makes me think. I meet a lot of people who are still investing their money the same way they were back in the 1980s when we had manual windows in our cars. Things have changed a lot since then and, frankly, things have gotten much better then they were back then.
If there was a better, more efficient, smarter way, would you want to know about it? And if so would you want to use it?
As the car aged the windows got harder and harder to crank up and down. I remember at one point having to use both hands to crank on the handle just to get the window rolled up. I swear it was cranking on those windows that gave me the amazing biceps I have today (wink).
Today's car windows have these fancy little buttons you push and the windows just go up and down with ease. I have to say I think the new technology is much better. Now one obvious disadvantage to the new and improved windows is that my children will never develop the amazing upper body strength I have.
But it makes me think. I meet a lot of people who are still investing their money the same way they were back in the 1980s when we had manual windows in our cars. Things have changed a lot since then and, frankly, things have gotten much better then they were back then.
If there was a better, more efficient, smarter way, would you want to know about it? And if so would you want to use it?
An Amazing Legacy
Our firm specializes in working with folks who are retired or just a few years from retirement. I'm fortunate to work with some people who will be retiring or have retired at a very young age.
Recently one of these young families invited me and my family to their beautiful home for dinner. They have two boys who are in there early teens. Before dinner our host asked us all to join hands, and then he looked at his wife and his two boys and said, "Shall we say the long version?" They then proceeded in unison to say a blessing over the food.
After the blessing I said, "WOW, what an awesome prayer," and I learned this prayer was passed down from his Grandmother. Apparently she made all of the grandkids memorize it one Christmas.
We had a wonderful meal with wonderful people, and I couldn't help but be inspired by this prayer legacy they are leaving for their kids.
One reason I love the work we do is I am often surrounded by amazing people who inspire me, challenge me and make me think.
I emailed this family and asked if they would mind me sharing their prayer with you, and they agreed so you can read it below. I heard Les Brown say, "It's not what we leave to our children and granchildren, but what we leave in them, that matters." Before you read this prayer here is my question for you.
What are you being intentional about leaving to the next generation?
Jason-
Here's the grace that Grandma made all us kids learn one Christmas. I just looked it up on the Internet at it was actually written by Rebeca Weston in 1884.
Recently one of these young families invited me and my family to their beautiful home for dinner. They have two boys who are in there early teens. Before dinner our host asked us all to join hands, and then he looked at his wife and his two boys and said, "Shall we say the long version?" They then proceeded in unison to say a blessing over the food.
After the blessing I said, "WOW, what an awesome prayer," and I learned this prayer was passed down from his Grandmother. Apparently she made all of the grandkids memorize it one Christmas.
We had a wonderful meal with wonderful people, and I couldn't help but be inspired by this prayer legacy they are leaving for their kids.
One reason I love the work we do is I am often surrounded by amazing people who inspire me, challenge me and make me think.
I emailed this family and asked if they would mind me sharing their prayer with you, and they agreed so you can read it below. I heard Les Brown say, "It's not what we leave to our children and granchildren, but what we leave in them, that matters." Before you read this prayer here is my question for you.
What are you being intentional about leaving to the next generation?
Jason-
Here's the grace that Grandma made all us kids learn one Christmas. I just looked it up on the Internet at it was actually written by Rebeca Weston in 1884.
Father, we thank thee for the night,
and for the pleasant morning light;
for rest and food and loving care,
and all that makes the day so fair.
and for the pleasant morning light;
for rest and food and loving care,
and all that makes the day so fair.
Help us to do the things we should,
to be to others kind and good;
in all we do, in work or play,
to grow more loving every day.
to be to others kind and good;
in all we do, in work or play,
to grow more loving every day.
The importance of tithing
I heard Dr. John Maxwell say in an interview that God created us to be a river not a reservoir. God gives to us what He knows will flow through us.
At church on Sunday morning, one of the pastors said when we give, we open up space for God to come into our lives and our communities and work His miracles.
My friend Frank Reed has helped teach me about tithing. He wrote a book called, "In God We Trust, Dollars and Sense". This is a good book if you would like to learn more about the importance of tithing.
As always, the best resource is the Bible. To quote the book of Luke 12:34, "Wherever your treasure is, there the desires of your heart will also be."
I'd like to hear from you. How has tithing made a difference in your life? Why do you think its important?
At church on Sunday morning, one of the pastors said when we give, we open up space for God to come into our lives and our communities and work His miracles.
My friend Frank Reed has helped teach me about tithing. He wrote a book called, "In God We Trust, Dollars and Sense". This is a good book if you would like to learn more about the importance of tithing.
As always, the best resource is the Bible. To quote the book of Luke 12:34, "Wherever your treasure is, there the desires of your heart will also be."
I'd like to hear from you. How has tithing made a difference in your life? Why do you think its important?
How much can I earn and still collect my Social Security benefits?
If you were born between January 2, 1943 and January 1, 1955, you can begin taking your social security as early as 62, but you will take a 25 percent reduction of what your full benefit would have been had you waited until your full retirement age. Remember, if you begin taking social security at 62, and you are still working, your social security benefit will be reduced by $1 for every $2 in earning once you have earned more than $14,160 in 2011. We have developed a new website where you can learn more about social security income planning at www.SocialSecurity-Planner.com.
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