HOW WILL YOU SPEND YOUR MONEY?

Actively paying for something you can’t see, hold or live in can be a difficult concept to grasp. However, if you could guarantee a steady flow of money for the rest of your days – long after your big paydays are gone - would you do it?

By Tamiko Toland

There is nothing like being on top of your game, knowing that this is your moment. The spoils of victory come along with that and there’s nothing wrong with celebrating, whether it’s by taking a luxurious night out on the town, making a few additions to the wardrobe or buying a new set of wheels.

But months or years down the road, are you really going to remember why you bought yourself those things in the first place? Did you stop wearing that watch when you got an even nicer one and are the clothes just taking up space? You can turn some of that excess – stuff you really don’t need anyway – into a guarantee. It can guarantee you that no matter how long you live, you will keep getting paid.

Living with less is not a concept many people warm to immediately. After all, you want to enjoy your money now and, as a pro athlete, the money seems like it will never run out. It can if you’re not careful.

An annuity can help prevent that from happening. Yes, you have to fork over dollars now for something that you can’t touch, sit in, smell or wear. That can be a really hard concept to get your head around.

However, when you start getting checks from an annuity, they’ll keep coming as long as you’re still kicking. That, on the other hand, isn’t a difficult concept at all. It might feel a little strange at first to sign a check and have nothing to put in your pocket, but its the smart thing to do.

Here’s why. Americans are living longer than ever. That’s great, but it’s also making a lot of people ask themselves if they’ll be able to afford to retire and live the way they always wanted to. If people who plan to retire at age 65 years old (or 72, or even later) are worried about another 30 years of retirement, what about professional athletes who may be in retirement twice as long?

Athletes may earn more money than most people during their careers, but that money has to last much longer. And if you and your family have gotten accustomed to a certain lifestyle, you’ve got to think about how you’re going to keep that up once the big paychecks are done.

An annuity is a great way to get some peace of mind. You will know that there will always be a paycheck waiting for you, no matter what happens in the meantime.

If annuities are so great, then why don’t you hear about everybody buying them? One big problem is that most people don’t understand how they work and may have heard that they are just a way for insurance companies to make lots of money. (If they really were a scam, state insurance departments wouldn’t let companies sell them.)

If you are interested in buying one – and you probably should be -- it’s not important to become an actuary. But, it does help to understand how the insurance company is able to offer a lifetime guarantee.

Basically, none of us knows how long we’ll live, so we don’t know how much to save or spend to keep an income stream coming in. If you try to do this yourself, you could end up either running out of money before you die or pinching pennies to spend a lot less money while you are alive than you really need to.

On the other hand, insurers have a pretty good idea, on average, about how long most people who buy annuities will live. This makes it a lot less risky for the insurance company to guarantee a payment for life for a large group of people than an individual person to do it on their own.

This is the same idea as homeowner’s insurance, where people pay a fee that is much less than the cost of their homes because the chance of one house being destroyed is fairly low, but money collected from many people also insuring their homes pays for individual claims.

Also, when the risk gets “pooled” together like this, so does the money. The money from the people who die and no longer receive payments helps raise the payments for everybody.

Annuities where payments stop completely after death are called “life only,” but there are other options available that guarantee payments to beneficiaries for a certain number of years or until the initial premium payments are returned.

Often, people talk about life only annuities because they generally have the highest payment per month, but for people annuitizing at younger ages, the cost of the other options is relatively much lower because the chance of dying prematurely is also very low. For a 40-year-old man, a life annuity that promises to return all premiums to the beneficiaries if he dies early would pay about 1% less than a life only annuity.

The point about annuities is not that they’re necessarily the highest-returning investment that you could buy – that’s a different question with a much more complicated answer. But, when you are thinking about today’s success and ensuring the lifestyle doesn’t end shortly after your career does, think about guaranteeing yourself recurring cash flow.

If you set aside some money that you know will be going toward a stream of income that is guaranteed to last as long as you do, see how much longer you’ll be able to enjoy that success by making one smart decision.