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By making simple, realistic observations about how real people actually live, we've found that many households are a good deal more secure than households that depend entirely on financial assets.
Can it get even better?
You bet. Suppose a portion of those financial assets that deliver an uncertain income are converted into a lifetime annuity, either fixed or inflation-adjusted. What does that do for the security rating?
It increases it.
Here's an example. Suppose one-half of the financial assets are converted into a life annuity and become 100% secure. Then the portion of living resources that is vulnerable gets chopped in half. Their security rating rises to 94.37.
Though few people choose to convert any of their savings into a life annuity, millions of people may still look forward to a lifetime pension that serves the same function -- less of their lifetime resources come from their accumulated financial assets.
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Follow the same logic and you can understand why having mortgage debt reduces your security in retirement. All other things equal, you have a greater dependence on income from financial assets.
Bottom line: If you have some savings, a healthy Social Security benefit, expect to own your home debt-free and live on a middle income, your retirement is likely to be far less uncertain than the retirement of someone with a much higher net worth.
Questions about personal finance and investments may be e-mailed to scott@scottburns.com. Questions of general interest may be answered in future columns. More columns by Scott Burns can be found here and here.
Published March 19, 2008
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