Earlier, in Part I, I referenced an idea that came from Moshe Milevsky. The central question he posed was “Do I have enough…or will I live longer than my money?”

This is a particularly vexing question. It’s one of those riddles wrapped in an enigma, to which it is impossible to provide a fully satisfying answer. Many of the tools we use as advisors to attempt to provide the answer, come up with quantifiable results, none of which are right. They generate a false sense of security that you do indeed have enough, when in fact you don’t.

As someone with almost 40 years in this game, I can legitimize almost any position as “being in the client’s best interest”, a position which in of itself is problematical.

As an example, I have a client who lost her husband two years ago, who now wakes up during the night with anxiety attacks. Intellectually, she knows some of her money should be positioned such that it will grow and provide a cushion against inflation in years to come. But emotionally, she cannot come to grips with that so we have to find the next best thing, which is where life annuities enter the picture.

Since we cannot predict what inflation numbers will evolve to over time, and we cannot predict what interest rates will evolve to, and we cannot predict how long we will live, we have to make assumptions. The following chart attempts to answer the central question posed above. I include it here as allows me to support whatever position I think I need to make in order to cause the client to do something other than simply stand still.

The chart says, in effect, that in order to have $1000 per month of “inflation adjusted income” coming in, and you think its reasonable you will live to age 90, and the likely rate of return after taxes and inflation is 1.5% per year, they you better start with an investment account of $251,300. The 1.5% as the investment return is the best rate you can actually guarantee in today’s environment on an after-inflation basis. Life expectancy for someone age 65 is 84.2. However, if you use these numbers, and are still alive at 84.2, then you may have to shoot yourself if you reach 84.3 if the assumptions we made earlier prove to be correct.

Alternatively, you can probably purchase an annuity contract, designed to give you an inflation adjusted $1000 per month for $230,000. That’s good, but if you are alive at age 91, the income stream has stopped. But most of us are willing to accept that since today we don’t know that many people age 91 who spend this kind of money every month that we do.

But the point of all this is, if it results in my client NOT waking up in the middle of the night with an anxiety attack, that’s a good thing. Is it, intellectually, the best choice? No, probably not. But its not my money, and its not me who is afraid, so I am the one who should compromise when it comes to doing what is in the clients best interest.

Stay tuned…