Personal Finance Round Up

First up is another article stating that Gen-X is doomed for retirement. Another article I saw today (sorry no link) said that something like 1/3 of Gen-Xers have less than $10,000 saved for retirement. The article I linked to for this post has various sentiment stats about how few think they will have enough to retire and how many expect to work after they "retire." 

It's a fine article, a little salesy maybe but there is one point made that is wildly counterproductive. "Social Security was only intended to cover about 40% of retirement needs." Your Social Security amount is what it is. You should know what it is, understand where the numbers come from, balance out delaying or taking it early but the amount you get is what you get. It's an income stream. How much of your expenses will your payout cover? Do you need other income streams? If so, where will they come from, how much will they pay, can you cobble enough together to cover your lifestyle? If not, what can you do about it realizing something might have to give?

More trouble for Gen-X, we're the sandwich generation helping pay for our parents needs and our kids. I'm on the older edge of Gen-X. First, there's no way this is a new phenomenon. The article is right in making a "harsh" point. There is a balance to be struck between helping others and making sure your financial needs are covered or at least closed to covered. Getting 80% of what you need while taking care of family doesn't seem like a catastrophe to me but being one of the many (apparently?) of Gen-Xers with less than $10,000 is a pretty big hole to dig out from.

Anonymous Twitter account Ivan the K made an interesting point. Thinking beyond the narrow portion of the population that reads investment blogs, it's a legit criticism that the move from defined benefit (pensions) to defined contribution (401ks) has not worked out for a meaningful chunk of the population. Balances are low and we collectively have a problem with financial literacy. More harshness from me; maybe 401ks were a bad idea for some but they are what the majority of us have. It is up to us to solve our own problems. As a starting point, on some level, everyone knows they need to save money. That simple fact can be a starting point. 

Finally the Wall Street Journal had pretty comprehensive article, even if it too might have been salesy, about Qualified Longevity Annuity Contracts (QLACs). I am not licensed to sell annuities, I've never sold an annuity and I never will. My curiosity here is simply as an investor trying to figure out what my financial situation will look like much further down the road.

The comments have plenty of naysayers on QLACs, they are worth reading. I'll stipulate every negative point about annuities. I've long said that many people I've known who have had annuities love them, warts and all. QLACs came about in 2014. Basically, you can take the lesser of either 25% or $200,000 from an IRA account to buy a QLAC. The money used to buy the QLAC is not subject to RMDs which for Gen-X will start at 73. It then will start to pay out at 85 and tax will be owed at that time. 

The Journal works through some numbers. There was an anecdote about someone who bought one at 79 and will get $16,000/yr starting at 85. Another example of buying one at 65 to start taking at 85 paying $11,000/mo seems like it was incorrect. A commenter called a provider and got a lower payout number.

Like anything, there are pros and cons. The cons I already stipulated. For positives, you are reducing your RMDs but of course not everyone needs that. A way to think of this, creating a payout for later in life,is that you are diversifying your income streams. To Ivan's point, you're putting the burden on someone else. You're paying for that privilege of course.

Some commenters pointed out that they could invest the money and do better themselves. Yes, maybe they could. If you think you could do better, you'd have that shot with the vast majority of your money, you'd be diversifying your manager risk by giving the insurance company a portion to manage for you. For a little sizing context, my wife and I have an HSA, we each have Roths, traditional IRAs and we have a joint account. A quarter of my IRA would be about 15% of our overall pie.

Part of the consideration for this needs to be a potentially harsh assessment of how long you might live. Anything can happen to any one at any time but if you've been exercising for a long time, your height to weight ratio is good and your blood chemistry is good then you probably need to plan on being around for a while and deferring withdrawals until 85 becomes a reasonable bet. A QLAC could become a safety net for portfolio mistakes a confident individual might make.

The catalyst for my interest in this is the RMD benefit. 3.6% to maybe 5% per year not taken on maybe $100,000-$200,000 for 12 years would add up. There's value in that even if paying for an annuity isn't worth it. 

Personally I have a long time to keep learning about this. I can't seen giving my money to the insurance company as soon as 65 but waiting until 79 probably isn't optimal either for anyone so inclined. There's no downside to learning about these. The positives are compelling and the negatives can probably all be summed up with yeah, but it's an annuity. That's fair game. 

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