Annuity Strategy: Guaranteed Income in Your 50s
I named the Flex Strategy years ago but started using it several years before that. Alternative ways of producing retirement income were the initial motivation when this online venture started in the early years of my career. No one knew what the term meant and I suppose my marketing has worked because lots of people ask about it and it even made its way into the latest edition of Annuities for Dummies. It was a valuable strategy when rates were really low and now it has changed a bit. In an update last year, I explained how it is the best way to analyze various annuity options to see which is best. It’s not as much about being profitable and efficient as it is about finding what you like and everyone is different.
I ran across a case last week that drives this point home. A young couple looking to retire in a year or two wants to see if the Flex Strategy will give them an advantage with the numbers. They have enough to retire but not so much that there are going to be a whole lot of options. The best annuity deals I’ve sold in the past couple of years went to younger people who are willing to defer things for a handful of years. The solution for these guys will likely include elements of that and discretionary spending can be done with a flex approach. This will end up shedding some light on the most efficient way to do things and I plan to explain it in a way that’s different from anything else I’ve done.
I’m gonna take this out 30 years from now and calculate the cumulative total spending that is planned. Baseline income needs are $70K per year but planning for $110K per year will also cover discretionary spending. At the ages of 55 and 51 and retirement hoping to come in two years we have the variables needed to see how much it costs. Social security comes into play but it’s several years away. The 55 year old expects $26k per year at age 62 and the 51 year old will get $20K per year at the same age. Here’s how I look at the cumulative income gap.
- Initial retirement at ages 57 and 53, $110K per year for five years- total $550,000
- The older individual will take social security at 62 and it’s four more years until the younger individual can claim. So, that’s $84K for another four years- total $336,000
- Then the younger individual will claim social security and they will reach the point of a long term income gap of $64K per year- after 19 years the total is $1,216,000.
- Total income gap of $2,102,000 for the 30 year period when the couple will be ages 85 and 81.
We of course will plan for life beyond that but we are just now starting to analyze this and the best way to work through the process is to take it one step at a time. If making a long term commitment it’s best to spend as little as possible on the bulk of the problem. Since the lifelong income gap is $64K we start by solving for that. How much will it cost and when should they start taking income?
If they buy it now and take income in two years at retirement it will cost right around $1M. I don’t find that acceptable and I’m sure they won’t either. Although that would make retirement easy it’s probably not worth the expense.
Since there are issues with pre-59.5 withdrawals, the next logical step would be to defer the income until the younger person is age 60. Buying today and deferring for nine years would cost right around $540K so it cuts the cost by almost half while only giving up seven years of income that would total only $448K of cumulative income. There’s much more leverage in deferring the contract for nine years.
And finally, how about we look at deferring for 11 years? Both would be collecting social security and that’s when the long term income gap is the only thing left to consider. Buying now and deferring for 11 years would cost about $480K but they’d be giving up $128K of cumulative income payment and only saving $60K on the purchase. Deferring for nine years is a better deal.
Here’s why I look at this as a valuable first step. Remember in the beginning that the cumulative income gap over 30 years is $2.1M? This shaves more than $1.3M off of that and makes the retirement plan much more reasonable. The majority of what remains is covered over the short term so the next step is to plan for that. Options for that will include ladders of CDs, Bonds, or MYGAs and guaranteed interest rates will allow us to discount it back to a purchase price today, further reducing the long-term income gap. Non-qualified assets should be used for this because it will be easier than taking early retirement plan distributions. I covered that last year and almost everyone who has that option doesn’t take it.
Podcast from October 19, 2023 Early Retirement Plan Distributions
Inflation is another part of the equation and I did not forget about it. Because a full retirement plan can probably be achieved for less than two thirds of their assets. The Flex Strategy can play a big part in discretionary spending and there will be plenty of growth between that and additional assets in the market. Being flexible offers the opportunity to make the most of all assets as the market changes over time. Continued planning is required in every situation so we will be able to make those adjustments and meet the challenge when the time comes.
Guaranteed income is a really good idea for this couple because it offers such a good deal. The Flex Strategy can be used in addition because it almost never makes sense to go all or nothing with one strategy. Let’s see how they like it and if they decide to move forward then there’s plenty of room to follow up and put the remaining pieces together in another episode. Let me know if you want me to do the same thing for you.
Have a great weekend!
Bryan
Podcast Episode 136: Annuity Strategy For Guaranteed Income in Your 50s
Further Readings:
Fidelity Annuity Recommendation
Fidelity Investments Annuity Marketing in 2024
Surrendering of Allianz Products
Last Updated on August 29, 2024 by Bryan Anderson
