18 April 2014 0 Comments

Live or Leave? That is the Question

shutterstock_147680771Did I get your attention?  Ok, so here’s what I mean by this provocative question.  More than one acquaintance of my wife and me who fall into our general age category—the 70’s—have voiced a concern with the dilemma posed by this question.  That is, they want to live their retirement years to the fullest, enjoying travel and entertainment, but, at the same time, they want to leave something for their grandkids when they are gone.

The dilemma caused by this desire to live it up now while leaving a meaningful sum for kids and/or grandkids can have a strangulation effect on leisure plans and investment choices.  Even couples whose assets are sufficient to provide them with the comforts they say they want and who have provided for the potential of age related expenses with Long Term Care Insurance, seem frozen in place when it comes to spending money on themselves.  They want to make sure there is “something left for the kids.”

There is one way for them to assure their legacy, while identifying exactly how much of their net worth they can enjoy and spend today.  Take the case of Fred and Sally.  They are both in excellent health and retired.  He is age 70; she is 68.  Their home mortgage is paid off and they are living on Social Security and the proceeds of a 401k plan.  Additionally they have about $500,000 of invested savings and have Long Term Care Insurance.  They are living comfortably and that investment fund allows them to spend a little extra on themselves.  Yet every time they dig into that $500,000 pool, they feel as though they are robbing their grandkids.

Fred and Sally sit down with their financial advisor who asks them what the minimum amount is that they want to leave after they are both gone.  They settle on $250,000.  That would be a nice sum that would help those kids in their early years.  The question is, how much would need to be set aside today to assure delivery of $250,000 at the time the second of them dies?  They apply for a $250,000 Second-to-Die Universal Life policy and are surprised that a single premium today of $76,565 is all that is needed to absolutely guarantee delivery of $250,000 when the second of them dies.  By transferring only $76,565 from their investment funds they have guaranteed a $250,000 payment.

Not so fast, their banker says.  That sounds good, but compound interest can be tricky he says.  What is the real rate of return on that $76,565 transfer?  Of course, that depends on when the second of them dies, but here are some examples of what rate of return would be required to produce that $250,000 payment:

Age of Fred/Sally at Second Death                             Rate of Return

80/78                                                                                     12.56%

85/83                                                                                      8.21%

90/88                                                                                      6.10%

95/93                                                                                      4.85%

100/98                                                                                    4.03%

105/103                                                                                  3.44%

110/108                                                                                  3.00%

No income tax is due at any time and since their total estate is well under the Federal Estate Tax exemption, there is no Estate Tax.  Proceeds pass outside of probate.  No investment decisions are required after the policy is issued.

What a carefree way to live it up now while leaving it for those you love.

Next, I’ll delve a little further into this Live or Leave question…is it really the best way to go?

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