Die with Zero Chapter 4: How to Spend Your Money (Without Actually Hitting Zero Before You Die)

Perkins acknowledges, “dying with exactly zero is an impossible goal.” By this he doesn’t mean spending all your money now and living destitute the rest of your life. He means spending your last dollar as you take your last breath. His recommendation is to use two primary tools to get as close as we reasonably can.

Firstly, life insurance companies make it their business (literally) to estimate how long you will live. While almost nobody is “average”, with nearly 100% falling on either side of the mean, insurance companies are extremely accurate in knowing when we will die on the average (law of large numbers). When applying for life insurance, they require various pieces of medical information to make this assessment. Perkins recommends going to https://livingto100.com/ to get an estimate of how long you will live. I just took the assessment, though I didn’t have a few of the metrics it asked for such as blood pressure, cholesterol, etc. I got a result of 87. Sounds good to me!

Secondly, Perkins recommends using income annuities to transfer the risk of longevity (living longer than you/an insurance company would expect). He anticipates that his readers who have reservations about his proposal to die with zero do so mainly because of a legitimate concern of outliving their money. What if I spend like Perkins recommends and then end up broke with 10 years of life left in me? Luckily, insurance companies also are happy to take on this risk themselves (it’s the opposite risk of life insurance) in the form of an income annuity. You transfer an amount of your savings to them, and in return you can get a lifetime income, no matter how long you live.

Before I talk about the bad and the ugly from this chapter, let me mention the good. Perkins says “the premise of this book is that you should be focusing on maximizing your life enjoyment rather than on maximizing your wealth.” Amen and amen. I differ from Perkins about what we ought to enjoy, and what we ought to do when life isn’t enjoyable (i.e. when we aren’t enjoying what we ought to), but I’m on board with this premise given my caveats. For some of you reading, this might be enough of an insightful shift that I’m happy for you to stop reading here, and to spend some time reflecting on how to better use your money to get more enjoyment in life. To start, I’d encourage you to make a list of the people, causes, and activities that are most important to you. Then ask how you could spend more money to improve those people’s lives, your relationship with them, to further those causes, to engage in those activities, and on and on.

For those who are interested in the mechanics Perkins recommends to get there, continue reading.

In theory, and sometimes in practice, income annuities are wonderful. But here again (this time for different reasons) I diverge from Perkins. I don’t disagree with him here for his premises (as I do elsewhere), but simply because he has wrong information about annuities and the financial industry. While acknowledging that he’s not a financial advisor, it is borderline concerning that the information in this chapter on annuities was able to get published! It’s not nefarious or deceptive, it’s just blatantly incorrect in a few key areas. 30 minutes of research from him or his editors would have avoided this. Two important corrections to note:

1. He mentions “the 4% rule” “whereby you withdraw 4 percent from your savings each year of retirement.” Perkins’ understanding of this rule is a common misunderstanding of the 4% rule. The 4% rule is not withdrawing 4% of your portfolio each year. Instead, it is based on the research of Bill Benegen, and the “rule” recommends that at the beginning of an estimated 30-year retirement, with a 50/50 stocks to bonds portfolio, you withdraw 4% of your portfolio in the first year. Each year after that, you increase your withdrawals in dollar terms, increasing for inflation, without consideration of how your portfolio performs. So only the first year is a 4% withdrawal rate, while future years could be higher and/or lower.For example, if you have a $1,000,000 portfolio at retirement, the first year would indeed withdraw 4% gross from your portfolio, or $40,000. If in year two, your portfolio declines to $900,000, you then withdraw $41,200 (assuming a 3% inflation/CPI), which would be a 4.6% withdrawal rate, and on each year going forward.
   

2. He mentions that “with annuities, your annual payouts will probably amount to more than 4 percent of what you put into the annuity—and, unlike the 4 percent withdrawals, those payouts are guaranteed to continue for the rest of your life.” Given that Perkins’ doesn’t make any money when you buy an income annuity, I’m going to assume he’s not using this language as a good salesman, but as an uninformed consumer. Are annuity payouts higher than 4%? Yes. Are they contractually guaranteed to last the rest of your life? Yes. Is there information missing from this picture? Also yes.With historically high interest rates (which makes these more attractive), you could get an annuity with a payout rate of close to 8%. A recent list I saw had the top payouts at 7.8%. I built this simple spreadsheet to show how to compare these two options. There is much missing from here, chiefly sequence of returns risk, but this takes us one step further in understanding these annuities.BFS Calculations - see the tab on annuity vs investingWhile 7.8% is nearly double 4%, that will produce an income stream that decreases year over year in real terms (after inflation), while the 4% will allow your income to increase with inflation each year. For a 25 year period of income for each, they’re near identical in terms of inflation-adjusted total income. The difference? Keeping the investments yourself also leaves you with an account of $133,000, or 1.3x what you started with. How much do you have leftover with the annuity? $0. So one is worth close to double the other. This doesn't mean we’d never recommend an income annuity, it means it’s helpful for people whose concern is not maximizing income, but for those who want to maximize predictability (and have more money that they will ever need).

3. Okay, one more quick point. Perkins also says that “annuities are the competition” for advisors who get paid via assets under management (as we do), and then defines “fee-only” advisors as those who get paid only a flat fee for their advice who might be more included to set you up with an annuity. On the latter point, almost all “fee-only” advisors only charge based on assets under management (the way Perkins says they can’t/don’t). Those who only take flat fees wear the label “fee-for-service”, and are a very small portion of our industry (but growing, which I think is a good thing!). More importantly, on the former point, advisors who truly are “fee-only” also get a fee for managing your annuity in the exact same way they would manage the funds directly, so that makes them neutral. Beyond that, advisors who are not “fee-only” and get a commission for selling annuities often would rather sell you an annuity than charge a management fee for two reasons: they make more money (and often all of it up front), and their responsibility to you is much lower. More money for less work might be best for them, but it’s very likely not best for you.

Thanks for those who are still with me 😊

Let us know

• Take the exam at https://livingto100.com/ (yes, you’ll have to hand over your email address to get your results), and let me know what your result is.

• Would you feel different if your portfolio income (from investment accounts) were guaranteed to last for your entire lifetime?

Until next time, happy reading!