Q. Can I be said to be a millionaire? I have cash-type assets of about $180,000. I have a 401(k) worth about $82,000. My paid-off home is worth about $175,000. I will also receive a defined-benefit pension. I could receive it (retire from service) about five years from now, when I will be 53 years old. My annual statement gives the currently projected "lifetime annuity value" as about $1.515 million. I believe it is based on a $4,520 monthly benefit over my estimated lifetime (53 years to 81 years of age). A rough calculation of present value says this is worth about $570,000. That, plus the above assets, gives a total right at $1 million. ---D.J., by email from Dallas, TX
A. It would be safer to say you are a “virtual millionaire.” The value of your monthly pension is the sum of money, invested today, that would produce
It is quite likely that the combination of your pension and Social Security benefits makes you a millionaire entirely in virtual assets. Of course, if you counted millionaires this way, they’d be a dime a dozen.
Few realize it, but it costs a great deal to buy a single premium inflation-adjusted life annuity. That’s what Social Security provides. Generally, they cost about 50 percent more than a conventional fixed annuity.
Let me give you an example, using quotes for a Vanguard inflation-adjusted life annuity. Suppose you are an average worker retiring with a Social Security benefit of about $1,100 a month. Since your spouse may receive that benefit as a widow upon your death, it is likely that one or both of you will receive that benefit for about 25 years. The value of that income stream is a virtual $264,289. (You can get quotes at http://www.aigretirementgold.com/vlip/VLIPController?page=RequestaQuote.) In addition, your spouse also receives benefits.
These benefits would be valued based on your individual life expectancy. The total is the virtual value of Social Security for a couple. Add the value of Medicare benefits, and many Americans are virtual millionaires on the basis of their Social Security and Medicare benefits alone.
Why am I telling you all this?
Simple. The financial services industry routinely emphasizes our savings--- our financial assets. Putting primary attention to these assets is appropriate for the top 5 or 10 percent of all households. But for the other 90 percent, the big levers are Social Security, a pension, if you have one, and home equity. For most people, financial assets are a distant fourth.
This reality means that true financial planning involves more attention to benefits and homeownership. And less attention to saving and financial assets. Indeed, in my new book with economist Laurence J. Kotlikoff, “Spend ‘til the End,” we don’t get to managing financial assets until page 236 of a 300 page book.
Q. Part of my income comes from interest. With CD rates so low, I am looking at municipal tax-free bonds for higher rates. I am considering only AAA-rated bonds that are insured. Are they safe? Do the ratings and insurance really mean they are safe? I have heard that the rating system needs to be reviewed to make it more meaningful.---W.B., by email
A. Buying municipal bonds isn’t a fruitful activity for most people, most of the time. The reason for this is simple: The tax-free yield is usually less than a comparable taxable yield security by an amount equal to or greater than your tax bracket. So there is little or no spendable advantage--- unless you are in a very high tax bracket.
But now isn’t “usually” or “most of the time.”
Recently, 5-year-maturity AAA munis were priced to yield 3.25 percent, while the national average on taxable 5-year CDs was only 3.48 percent. If you file a tax return and pay taxes, you’d be slightly better off in the AAA munis! If you are in the 25 percent or higher tax bracket, buying munis will make a real difference in your income.
Given the financial condition of the firms that insure municipal bonds, you should prefer uninsured but AAA-rated bonds over insured bonds.