I have been hearing this more and more about how a retiree should not sign up for the joint & survivor benefit option (if married) and go with the life annuity option. The premise is that the life annuity will give them a bigger benefit that they can invest the difference in the two benefits and have more money to pay to their spouse when they die. Unfortunately, this is an old myth created by life insurance agents to sell more life insurance policies that has continued because people do not understand the math behind the issue. They just see a bigger benefit and focus on that.

To understand this better, when a person selects a monthly annuity from a company, the factors used to adjust the life annuity to a different benefit form (e.g., joint and survivor annuity) are based on what is called actuarial equivalence factors. The factors convert a benefit in a way that the “normal” person would receive an equivalent benefit no matter what option he/she choices. For example, if a retiree has the options of choosing between a $1,000 per month life annuity versus $850 100% Joint and Survivor option (where $850 is paid to the retiree and spouse when either one is alive), the joint and survivor benefit is smaller because it is expected to be paid out over a longer period instead of a shorter life annuity paid only when the retiree is alive. Based on actuarial tables, both options would pay out the same amount benefits on a present value basis.

Second thing to understand is to get a similar benefit from the life annuity option as a from the Joint & Survivor option, the retiree will need to buy a term life insurance benefit to pay for an annuity for the spouse when retiree dies. By doing this the retiree is paying two commissions (one commission on the life insurance and another on the annuity). Thus, instead of making money, the retiree is usually paying it out any profit to pay for commissions instead, thus actually losing money. Sure, people can show examples of where a person can win by selecting a life annuity option, yet they tend not to show where people (actually their spouse) can lose if the retiree dies to soon.

For example, let us assume retire and spouse are both age 65

- Life Annuity - $1,000 per month

- 100% J&S Annuity - $850 per month

- Difference is $150 per month

If the retiree dies immediately, the spouse would need approximately $135,000 (based on calculation done at Vanguard to get an equivalent $850 annuity per month. Now, the retiree can buy term life insurance for slightly less than $150 per Insurance.com yet it is for a 10-15 year term policy being assuming the retiree is in superior health. If the retiree is not in the best of health at 65, he would be paying a lot more money for the policy than $150. In addition, he is opening his spouse up to risks if he lives past the age 75 because he still needs to buy additional term life insurance. At age 75, he would have only accumulated $12,000 in savings ($75 per month at a 6% return) which will pay his spouse for only 90 to 100 months which is not enough if she lives into her mid-80s. However, buying life insurance at age 75 to have the additional benefit needed to guarantee annuity benefit to the spouse for her life will cost more than any savings (e.g. cost will be over $200 for a 10-year term policy in the best of health) that is if the retiree can qualify for life insurance at all.

Yes, the extra $150 per month does sound enticing. However, it does open up the retiree’s spouse do large risks:

• Cost of term insurance goes up significantly with age, so any perceived savings is reduced and eliminated in future years with additional costs

• Spouse may significantly outlive the retiree and any additional savings they may have accumulated

• Any short-term savings assume the retiree is in the best of health to qualify for term life insurance

• In future years, the retiree may not even qualify for term life insurance based on his future health condition (e.g., having a heart attack, cancer, etc.)

Thus, before selecting a life annuity instead of a joint and survivor annuity, understand the risks involved to the spouse if everything does not go as perfect as in the example from the insurance agent or financial planner. There may be times when the math does work due to age, sex and health of the retiree and spouse. However, with commissions paid to the agents, any profit can quickly erode any of the profit and there may still be risks involved.

Note, an insurance agent will say that there is a benefit because life insurance is paid out tax-free. This tax-free benefit will not change my example significantly. For example at a 33% tax bracket, the $150 extra a month for a life only benefit will be reduced to $100 after taxes are paid ($1,000 life only benefit is $667 after-taxes and $850 joint & survivor annuity is $567 after-taxes). Because the retiree only need $567 annuity for his spouse after his death, he will only need 2/3rd of the $135,000 life insurance benefit. Thus, instead of paying $75 for $135,000 of life insurance, he is paying $50 or so. As you are starting to see, the initial example without taxes is similar to an example with taxes factoring in the tax-free distribution of a life insurance benefit (just all results are reduced by 1/3 for taxes). Thus, because life insurance is paid for with after-tax money, reflecting the tax-free benefit of a life insurance payout does not materially affect the initial example.

As the holiday spending spree is upon us, December can be a joyous month with the holidays and visiting family and friends. However, it can lead to a stressful New Year as the bills start coming in. Thus, before you head to the mall, there are a few items to think about:

• Do a Budget

There are many extra expenses that occur this month and next month that should be planned for (e.g., increase in home heating costs, holiday presents, travel costs, special holiday tithe, property taxes due in January, etc.). Thus, before you go spending on presents, calculate how much these bills will become due in January (e.g., heating cost). The credit card bill in January should not come as a surprise that you are not ready for. Even if you do small gifts for your family, these gifts can add up ($20 here and $10 there). The key is to list out all the people you want to buy for and have a good estimate of how much their gifts will be. Don’t say $300 for gifts of the top of your head without allocating it to each person and move on because it is easy for the $300 to morph into $400 as you enter the mall and get enticed by bigger presents. It is o.k. to spend $400 if your budget allows for it. Yet, many people overlook the consequence that even $100 can have, until the bill comes in January.

• Don’t Give Up

Even before sitting down to do a budget, some people think “what is the use to planning” because there is not enough money. They revert to the mentality of being doomed to put the expenses on a credit card and pay it off through out the year. Yet, by giving up, you may find yourself in an even worse situation than before. If you think that you will go $500 in debt due to higher airfares and heating costs this year, that $500 can easily become $1,000 unless you map your budget out ahead of time and work towards it.

• Think about the Meaning of the Holiday’s

As we are inundated by commercials, it is easy to overlook the true meaning of the holidays. The holidays have gone from a religious holiday to a commercialized shopping frenzy. Even though we talk about it each year, how many people step back and revisit the true meaning of Hanukah, Christmas or Kwanza? We may spend a few hours at our place of worship, yet this time is usually dwarfed by the time looking for that perfect gift.

So what do the holidays mean to you? Is it time to remember your spiritual/religious beliefs? Is it time to connect with family? Is it time to go overboard with giving in order to win the approval of others? Once you put the holidays into perspective it is easier to take step back when you are at the mall and ask if you really need to buy the extra gift.

• Giving is about the thought

It is easy to remember the oohs and ahs as that special gift brings when it is unwrapped. Yet, it is harder to remember that in a month time the gift is collecting dust in the basement. Thus, the old saying that it is the thought that matters is usually meet with a rolling of the eyes and thoughts of “here we go again with the Scrooge mentality of do not over spend” because we remember the special thank you when the gift is given.

Yet, for many, giving inexpensive gifts is a necessity of life. My sister-in-law’s finances are tight and she makes her gifts or just gives small gifts. It doesn’t matter to me because I know my 18 month old son will not remember what he got from his aunt. He will just remember spending time with her as we pull out the photo album. For example, the other day got a small wooden train set from my parents when they visited for Thanksgiving. He ended up having a lot of fun with the brown paper bag that they brought the train in. Yet, what he will remember are the good times he had with his cousins from all the photos my wife took.

Thus, remember that gifts are usually forgotten in about a month usually before the bill is paid for.

• Negotiate the Obligatory Gifts

If you feel uncomfortable giving a small gift while receiving a larger gift, then discuss limits to the gift giving with your friends and family. With my family, we rotate which sibling we buy for each year. Thus instead of 3 small gifts for each, we buy 1 nice gift for the one we have that year. For us, it is more of a time constraint of finding several gifts instead of one nice gift.

Many people are putting limits on gift exchanges (e.g., $10 or $20 limit). At my old firm, we had a gag gift exchange with a $5 limit with the twist of being able to swap gifts that others had. So at your family get together, think about making it fun (e.g., Secret Santa) instead of thinking what to get everyone.

Many parents in our son’s playgroup are starting to ask their relatives for a donation to their child’s college tuition instead of getting another toy that our children do not need. It is better to ask for what you want (e.g., future tuition) rather than getting upset for what you (or your child) got.

• Don’t Be Swayed By a Sale

In watching the news today, it seems that a trend for Black Friday (day after Thanksgiving) was men spending more than women for electronics. Part of it can be the lure of a sale makes it sound like the best time to buy that plasma television that they want. Even if you find that great sale, it can cost you plenty in credit card interest (maybe more than the discount itself) if you can not pay the credit card bill when it comes due in January.

Thus, know what you want and the price you are willing to pay for it before being swayed by the 50% off sign.

The holiday season should be the time of celebration and giving. I discuss that giving freely is a path towards prosperity. Yet, giving is about giving of the whole of who you are, not just your money.

A special thank you to My Financial Journey for highlighting my article Do You Judge Your Financial Situation as the best post of this week’s Carnival of Personal Finance.

On Monday, I wrote about being grateful for the bigger picture instead of resentful for the details of life. There is a gift to seeing the bigger picture. When we isolate on the day to day events, we can get stuck in the quagmire of details and issues. Yet, when we step back, we can see the beauty of life. Sometimes we can not see the impact of an event when we are stuck in the details. As time passes, we can see the lessons that we learned and how a single event can unfold to a beautiful master piece of life.

For me, two boys kicked a rock into my right eye when I was 5 years old where I am now blind in that eye. I could look back at the event as a travesty and be resentful. Yet, over the years, I have learned many lessons from the event. One of the most important lessons is that my feelings are not governed by the event but from my interpretation of the event. My anger about being blind was not due to the two boys but because of judgment of who I believed I was by being blind. Another lesson was forgiveness in seeing that it was not being blind in one eye that limited me (I know it seems small compared to others who have lost limbs), yet it was my beliefs that I created that limited me. When I was a child, New York State did not allow me to participate in high school sports due to being blind in one eye. Yet, when I did not allow being blind to stop me from playing intramural hockey later in life, no one could guess that I had only ½ my sight. So, in time, a single event in isolation can seem like a travesty. However, in the bigger picture, it has made me who I am and how can I complain about that.

In looking at our financial life, we can be upset over the rising prices of gas, college education, food, health care, etc. (the individual details) or be grateful for the beauty of life (having the freedom of choice to eat, work and worship where we want, having the experience of love and happiness, etc.). When we take events out of context of the large picture, we can be blinded by the illusion that events are either good or bad. We can learn that it is not the event that affects our state of mind, yet our judgments about the event. We can look at rising gas prices as bad or see it as a motivator to find new alternative fuels that will be cheaper in the future. We can see rising health care prices as bad or see that the higher prices are funding research for new procedures and drugs that are extending life. Or, we can see rising health care prices as a motivator to pursue preventative care (e.g., stop smoking programs, exercise programs, etc.) instead of using health care as a crutch for poor habits.

At the same time, being grateful for the individual things can lead to distress later as well. If we are grateful for our growing savings account or our children’s good grades, how would we feel if the financial markets change or our children start to slack off? Thus, if gratitude is based on what you have or do, it will lead to seeing events as either black or white (good or bad). If we are upset about our children’s behavior (e.g., slacking off or spending too much), we may miss the fact that having your children slacking off for a year and experiencing the consequences of their actions now is better than having them perform well only when someone is on their case (their parents for now and then their bosses). Sometimes learning experiences are done from making mistakes (what we consider bad). Thus, events are neither good nor bad; they just are (see Do You Judge Your Financial Situation?). This does not mean that we overlook negative situations either. If we are angry or upset about rising gas prices or our debt burden, we need to release the anger and practice forgiveness. Yet, we do not need to keep on going back to it either and wallow in the judgment.

In my article on Monday, I compared how life is easier today than it was for the Pilgrims to show that life is not as bad as some picture it is. In this analysis, I was isolating how specific instances are either good or bad rather than being grateful for the beauty of life which is still judging things (life is better today than 300 years ago). Thus, on this Thanksgiving, be grateful for the overall beauty of life instead of specific possessions because even if we judge a situation as good (something to be grateful for), we then judge other situations as bad.

Being the week of Thanksgiving, I started thinking about gratitude again. There are many things that we can be grateful. I am grateful for being able to spend so much time with my son while he is growing up and also grateful for The Ohio State Buckeyes winning on Saturday against Michigan. Sorry, but being from Cleveland there has not been too many other football moments to celebrate. At the same time, I also see how our society focuses on the negative instead of the positive. Part of this is the media knowing that we want stop to look over at a car wreck even though we also despise slowing down for rubberneckers who are looking at a wreck on the other side of the road. We may say that we want to be happy, yet when things are good we keep on looking over our shoulder waiting for the other shoe to drop. We say one thing (we want to be happy) yet find reasons that we are not.

I have discussed several times about what we think about expands. It goes to how we see our life. If we separate out what we see going wrong, we will not feel good about life when we are always trying to find something wrong. If you look at the news coverage, it picks out the special events that will get them the rankings while making people feel like they are unsafe, victimized and poor. We can see events about crime that gives us the impression that violence is rising, yet in reality crime rate can be falling. We can see how the middle class is having a harder time getting ahead with the increase cost of college and medical care. Yet, at the same time, more students are going to college and life expectancies have been rising.

What will finding things wrong and having resentments get us? I wonder how many people look at some stories of how hard life is (e.g., the unmanageable debt due to going to college) and then give up on their dreams because there is no use to get ahead. Yet, playing the victim role does not serve us in achieving our drams. So, why do we do we give up? Part of it is that we really do not believe how powerful we really are. I remember a time where a friend was driving down a road in an area deemed unsafe in Cleveland and stopped at an intersection. A man got into the passenger seat. Most people would freeze, think about recent car jacking stories and feel like a victim (“please do not hurt me”). Instead, she looked over and screamed “Get Out!” (she probably threw in another choice word or two as well). The man apologized and got out. The morale is that we can look at life at what is wrong and give up or know that we are more powerful than we believe we are and take action. Yet, if we keep on looking at what is wrong, we diminish our power. If we believed we could fix a problem, we would be fixing it instead of wasting energy of being resentful and blaming others for it.

Those that want to find problems and excuses will. The question is what do we focus on, individual details or the bigger picture. When we look at individual details, we may see more problems than there really are because they are easy to find if that is what we are looking for. I hear stories on how this generation may be the first ones not to have a better life than their parents. These stories make it sound like the sky is falling. Yet, as we have seen over the years, we have had times of expansion followed by things settling down and even taking a step backwards. After some time, things move forward yet again. The question on this week of Thanksgiving, do we want to see what we are grateful for or see how we may not be as better off than 6 years ago. We can see ourselves in debt and focus on that or find what we are truly grateful for.

I see how much we have to be grateful for especially looking at life compared to the first Pilgrims. We have religious freedom, equality and democracy that many people still do not have today all due to their actions. We have a life where living in poverty today is probably a lot easier than surviving their first winter here or living in some other countries today. Even with all the problems with medical care today, the uninsured receive better care than our grandparent’s generation. I am not saying that we can not do better. Yet, change comes from when we see how our action can affect the world versus how society is creating problems where we are resentful and feel trapped, just struggling to get by.