Annuities by the Numbers

Well, it turns out that there is something of a fourth installment of my series that I was supposed to have finished last week. I’ve told enough stories and you all are probably tired of it. Let’s add some numbers so I can show you how my learning, evolution, and solutions stack up to a real-time example.

I showed something similar several weeks ago but this is a new case that generally represents the fundamental reasons for looking at a different option. Most people who adopt my strategy do so because the market doesn’t offer the amount of income expected.

Don has been on my email list for a few years and now that retirement is a few months away he needs to shop for some income to cover expenses when he stops working. His request was simple. He and his wife had earmarked $230K and wanted to produce an additional $1200 per month in order to comfortably enjoy retirement.

With both people being 65 years old my gut instinct told me that he would be close. It’s no great achievement to find the highest guaranteed income payments if you’re in my shoes. Most consumers would need to visit multiple advisors in order to verify the best options, without any way of knowing for sure whether they had the best. But for me, it takes one email and a five-minute database search to confirm the best deal for any situation.

So I looked it up and my best guess was not even close. The money Don had earmarked for income would only produce $950 per month and it was an index annuity with a guaranteed income rider that beat out everything else, including SPIAs. It doesn’t seem like a very good deal, does it? Well, I have spent the past few weeks explaining how it has been a career habit of mine to find ways to get more income and an alternate strategy is never more useful than when rates are low and you need an alternative to meet expectations.

First of all, you need to calculate a break-even for the income stream. In this case, Don and his wife would take income for 20 years and two months before finally receiving aggregate payments that equal his initial purchase price. The couple would be 85 years old before finally beginning to profit from the contract. After the break-even point, the insurance kicks in.

Let’s take it back to my roots and see how a fixed annuity would do. Right now you can get about 3% so if he did that instead and used free withdrawals to take income, after 20 years he would have $103K remaining in the account. If you bump the yield up to 4% there would be over $150K left and at 5% he would barely invade the principal.

To get much more than 3% you would need to use an index annuity. Knowing that the basis will last for 20 years, any growth will put you on the positive side while keeping control over assets the whole time. If you can approach 4%-5% then you would have the opportunity to increase income to the desired $1200 per month. Another thing with doing it this way is that if rates rise when you get older the combination of flexible assets and higher payouts could potentially put someone in a position to switch strategies and take the guaranteed income later. It takes growth but it’s only possible when you keep control of the money.

This isn’t for everyone, rather it’s an option for those who can’t find what they want, or for anyone who wants more control over the funds. What’s interesting in this case is that when Don told me about the assets he plans to combine to buy an income annuity, I found out that one of the assets is an index annuity he has owned for a while with a few years left before it was surrender free. He was going to surrender it, take a small hit, and purchase an income annuity. When he told me how much was in the account vs. what he originally put into it, I calculated the average yield to be over 5.5%. He’s already part of the way there without realizing it yet.

He shouldn’t surrender his current annuity. He should buy another one since he already knows to expect the kind of performance needed to get to his desired level of income. But I don’t know what he will end up doing. For some, the peace of mind provided by guaranteed income is worth taking less and there are all sorts of factors that make the decision different for each individual. Yes, there are substantial benefits on either side of it so what you do will depend on your own personal factors.

Sometimes my numbers don’t work. Single life payments, older starting age and even deferral years will make the guaranteed income contracts more appealing. But in most cases, it’s close so I always run the numbers to at least verify the best path. When payments are much lower than expected but people are still interested in protecting some assets then it works well to use an annuity with good growth potential and the flexibility to make changes as time passes.

A few times every year someone comes to me and just wants the highest income payment. There’s nothing wrong with that and for those who want more income, more control, and more options then I have that covered too.


Further readings

Are Fixed Indexed Annuities a Good Investment?

Fixed Indexed Annuity Taxes

Who Shouldn’t Buy a Fixed Indexed Annuity

Last Updated on April 3, 2024 by Bryan Anderson