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The Cheapest Way of Guaranteeing a Lifetime Income.

November 3, 2013, 8:00 AM

What kind of insurance should a person make sure they have when they’re young, and when they’re old?

That’s a really important question because a lot of people don’t realize this, but insurance really substitutes for saving in many cases.  In other words, if you have good insurance against certain bad outcomes, then you don’t need to make provisions by setting up a reserve fund to take care of that.  You pay for it with your annual premiums.

I would say the most relevant example of this to the issue of retirement savings and investing is when people reach retirement age, if they don’t insure against outliving their income by buying what we call longevity insurance, that will keep paying them a lifetime income, no matter how long they live, they really have to hold back a lot of money. They have to have a big pool of savings. 

The most effective way of dealing with the risk of outliving your money, is not, as many advisors say, to put it in the stock market - that’s very bad advice.  The correct advice would be that you want to make sure that your income will last as long as you live.  

Buy from a double A rated insurance company, a lifetime annuity, that will pay you for as long as you live.  You don’t even have to save as much for retirement, because that will be the cheapest way of guaranteeing a lifetime income.

In Their Own Words is recorded in Big Think's studio.

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The Cheapest Way of Guarant...

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