Very
rarely would someone ask: are you or have you ever been a POW (“Prisoner of
War”). If you were asked that question,
you might ask what in the world they are talking about or jokingly respond that
you are indeed a prisoner – a prisoner of work.
But certainly, no one would admit to or even consider being a “Prisoner
of Wealth."
The
primary step to financial freedom is to free yourself from all the things that
make you a Prisoner of Wealth. What do I mean by Prisoner of Wealth? The story
of the Monkey Trap is a great way to illustrate this theory.
In the
jungles of Africa, trappers used to trap monkeys using a very peculiar
strategy1. They would carve a hole in a tree just big enough so that
the monkey could barely put their hand through the hole. Once their hand was
through, they could expand it and grasp whatever enticing bait or treat was
inside the hole. However, no matter how hard they tried, the monkey could not pull
the bait out. What the trappers found was that, most times, the trapper could
walk directly up to the monkey and catch it without needing to use a net or any
other trap. The monkeys wouldn't run away because they would never want to pull
their hand out and leave the bait. Thus, they were prisoners because of their
unwillingness to let go of the bait (their possession).
This
sets the stage for our theory on being a Prisoner of Wealth. Sometimes
clutching our possessions and wealth so tightly can lead to our demise or
downfall. Often in retirement planning, I see people who are obsessed with the
fact that they must retain complete control over their assets and live only off
the interest. Many times, these same people overlook great opportunities.
Let's consider
this hypothetical example:
We’ll call
this client Harold Truman (aka Harry Truman). Harry is a 70-year-old single
male who has $100,000 in an IRA CD. Currently,
Harry is frustrated with the low interest rate on his CD, which is currently at
2% per year, or $2,000 per year of interest.
Harry
is further frustrated by the fact that he must take his Required Minimum Distribution2 (RMD) on the IRA at age 70.5. Harry
is now going to be forced not only spend down interest, but also the principal
of his IRA over his lifetime.
In
this example, I would recommend one of three options:
1) Harry selects a customized annuity
insurance product within his IRA that pays him an income as long as he lives. He
will receive an income of $500 a month, or $6,000 a year, which is the
equivalent of 6%. He'll receive this income for as long as he lives and he can
never outlive that income. If he dies any time before the 20th year, the income
will continue to pay out to whomever he designates as his heir.
Note: If Harry was
married, depending on the age of his spouse, for slightly less, he could have
this product continue to pay income for the rest of both of their lives.
2) This option is identical to the
first, except that Harry starts out at a much lower income of $306 a month, or $3,600
a year, which is the equivalent of 3.6%.
However, this income will continue to increase by 5% per year each year
for the rest of his life. If he dies any
time before the 20th year, the income will continue to pay out to whomever he
designates as his heir.
3) If Harry is concerned that
inflation and interest rates will soon increase, his third option is an
identical product to the first and second, but would provide him with an income
of $335 a month, or $4,020 a year, and includes a feature that increases with
the cost of living, similar to Social Security.
If he dies any time before the 20th year, the income will continue to
pay out to whomever he designates as his heir.
At
this point, you may be asking, what are these products? The product in Scenario #1 is called a “Life
with 20-Year Period Certain.” The product in Scenario #2 is called a “Life with
20-Year Period Certain, 5% COLA (Cost of Living Allowance).” The product in
Scenario #3 is a “Life with 20-Year Period Certain and a CPI-U Rider (Consumer
Price Index – Urban).” These products are what we call a “custom pension.” A
custom pension is based on your amount of money and current interest rates, but
also factors in mortality credits (more on this will appear in an upcoming
blog).
In Harry’s
case, the bottom line is that he will be able to get a minimum of $3,600 a year
for the rest of his life, no matter how long he lives. If he dies before every
dollar had been paid back, he can guarantee it will be paid to his heirs for
the remainder of the 20 years.
Harry was
quite pleased with this and it allowed him the flexibility he was looking for. By carefully considering all of his options, he
was able to meet his financial and retirement goals and avoid becoming a
“Prisoner of Wealth.”
For
more tips on how to avoid becoming a prisoner of wealth, check out our blog or contact us today.
1 "Monkey Trap: Staying Human (and rational) in
Conflict" Conflict Communications; http://www.conflictcommunications.com/monkey-trap.htm
2 "Retirement Plans FAQs regarding Required Minimum
Distributions” Internal Revenue Service; http://www.irs.gov/Retirement-Plans/Retirement-Plans-FAQs-regarding-Required-Minimum-Distributions
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