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Do not buy a cash annuity. Life estates and RAM mortgages that pay a lump sum or okay.

Posted by John Reed on

“Being of sound mind, I spent it all when I was alive.” That was a bumper sticker. Is it possible to do just that?
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Yes. With annuities. Academics love them because they so neatly take care of the uncertainty of having money until you die and also convert all of your wealth.
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You buy an annuity—generally from a life insurance company—for a lump sum. It typically pays you a month sum until you die. The monthly sum is based on your likely death date from actuarial tables and the interest rate the lump sum will earn before you die.
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If you die earlier than the actuarial tables predict, the annuity company makes a windfall profit. If, however, you are Methusela, and live longer than expected, the annuity company loses money on you but hopes to profit anyway on average because they have a whole lot of annuitants.
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However, the great danger, as with bonds, is inflation. In early 1920s Germany, Austria, and Hungary, they had hyperinflation. Who was hurt most by that? Annuitants. The purchasing power of each monthly payment drops precipitously likely to zero. The life savings converted to a monthly annuity payment is stolen by inflation leaving the annuitant penniless in terms of purchasing power.
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Is there such a thing as an annuity that would be paid in gold—the original indexing method? I am not sure. There seem to be a number of companies that use the word gold, but I do not think they actually pay in gold. It they did, you would need to make sure they had enough gold to pay you even if you live as long as Methusela, and that they have the integrity to keep giving it to you in spite of a society descended into lawless hyperinflation all around them. I would not trust anyone to do that. Also, receiving gold monthly would during the horrific conditions of hyperinflation would make you a prime target for robbery or burglary.
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What I think would work is a sort of annuity in real estate called a life estate. Normally, the owner of real estate has a deed. To create a life estate, the ownership is divided in two: one person or group of people get the life estate and another person or group gets the remainder estate. Very simply, life tenants (owners of the life estate get to use or live in the house until they die) and the remaindermen get fee simple ownership of the property when the last of the life tenants dies.
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In effect, the life tenant gets to live rent free until they die. The great benefit is that in inflation, the rental value of the house will climb continuously as the purchasing power of the USD plummets. In other words, it is adjusting like a cost of living index clause. But this is a perfect annuity. As the rental value of the house rises, the life tenant gets the instant benefit of that, not just some annual adjustment as in a typical cash indexed payment. And the benefit is exactly like an annuity. It stops when you die.
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Can you get a food annuity? Sort of. My father’s family had one when he was growing up. It’s called a subsistence farm. They grew vegetables, grains, and fruit in Pocohontas County, WV. They also raised livestock like egg-laying chickens, roosters, pigs, sheep, cows, horses. And they had a substantial large creek that had fish and forest with game animals. Again, they get the food until they die, although they have to do the work of farming, hunting, and fishing.
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Can you get a fuel annuity? On my father’s subsistence farm, they have 500 acres of mostly forest. And they had a wood stove. So a lifetime supply of fuel for hot water and cooking. They just had to gather it.
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What about fuel for your car? Unless you own a gas well, I cannot help you with that. Renting a room or apartment in a duplex could get you cash to pay for fuel. And you could use that cash to buy fuel. As with you getting free climbing rent to live there, a duplex or room rented out also give you constantly adjusting higher and higher rent in cash if your tenant has a way to earn that money and pay it.
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Medicine? That is extremely complicated with all sorts of private and government insurance. Beyond my expertise.
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My father’s family grew most food to eat themselves. But each year they grew a grain crop like corn or soybeans to sell to the local granary for cash. They could also cut trees and sell them to the saw mill.
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So that is some barebones examples of what I call annuities in kind. That is, you do not receive fixed monthly cash payments that are vulnerable to inflation. Rather, you get, until you die, a place to live and if it is a subsistence farm, food and wood fuel.
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Of course, you can pay for fuel and such with money that is not affected by inflation, like pre-1965 silver dimes, quarters, and half dollars that are 90% silver and worth about 23 times their face value today. Unlike annuities, your supply of pre-1965 coins may run out.
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Do NOT purchase a cash annuity. They are total disaster if there is inflation. A life estate, however, is a sort of annuity that instantly adjusts for inflation. If it is on a farm and you know how to farm, it could also supply you with food and wood fuel until you die.
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Some types of cash annuities are taxable income to the extent that some of your payment is interest. With a life estate, if you rent part of the property out, that is taxable income. If you just live in it, its income-tax free. Although you do have to pay the property taxes.
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If you have a reverse annuity mortgage—even one where you get paid in the form of a lump sum not a monthly payment—you typically get very much the same deal as a life estate. The main difference is that it ends when you sell the property or move out of it for one year. Generally, mortgage proceeds are not taxable.

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